The Federal Reserve wants to see more evidence that inflation is easing before resuming interest rate cuts. The latest data presented a mixed picture.
The central bank’s preferred inflation measure, released on Friday, climbed 2.6 percent in December from a year earlier, faster than its 2.4 percent rate in November and quicker than the central bank’s 2 percent target. Compared to the previous month, prices are up 0.3 percent.
After stripping out volatile food and fuel costs, “core” inflation was 2.8 percent, in line with its previous reading, data from the Commerce Department showed on Friday.
Price pressures have been a focal point for the Fed as it debates how quickly to resume rate cuts — it decided this week to take a breather. Since September, rates have come down by a percentage point, and now hover between 4.25 percent and 4.5 percent.
Beneath the headline figures, the details suggested that underlying inflation has stabilized. On a monthly basis, core inflation rose 0.2 percent, roughly in line with November’s increase.
New employment cost index data, also released on Friday, showed that compensation rose 0.9 percent in the fourth quarter, roughly in line with the pace earlier in the year. Oliver Allen, senior U.S. economist at Pantheon Macroeconomics, said the latest numbers released by the Bureau of Labor Statistics provided “some reassurance.”
Together with the gradual cooling across the labor market as fewer people quit their jobs, Mr. Allen said that “significantly softer underlying services inflation is still in the pipeline.”
Jerome H. Powell, the Fed chair, said that in order for the Fed to consider rate cuts again, it would need to see further progress on getting inflation down or labor market weakness.
The latest data supports the Fed’s view that it does not need to be in a hurry to lower rates at this point. Speaking on Friday, Michelle Bowman, a Fed governor, reiterated her support of that approach, saying the central bank should “take time to carefully assess the progress in achieving our inflation and employment goals” given her continued concerns about price pressures.
Austan Goolsbee, president of the Chicago Fed and a voting member on this year’s policy-setting committee, also supported a slower pace of cuts as he flagged what he described as better-than-expected inflation data in an interview with CNBC on Friday. Over time, he said that he expected price pressures to continue easing, which will allow for the Fed to lower interest rates further.
The economy has yet to falter, ending last year on a strong note with U.S. gross domestic product growing at a 2.3 percent annual rate in the fourth quarter once adjusted for inflation. The labor market has held up well too, bolstering officials’ confidence that a recession remains a distant prospect.
Uncertainty about President Trump’s economic policies has also muddied the outlook. Mr. Powell told reporters this week that officials were in a “mode of waiting to see what policies are enacted.”
“We need to let those policies be articulated before we can even begin to make a plausible assessment of what their implications for the economy will be,” he said. Mr. Goolsbee warned that the Fed’s signals were becoming less clear as it is forced to contend with changes in economic policies that may increase prices. High inflation has complicated things for the Fed, with a debate now raging about whether the central bank’s old playbook for how to deal with trade tensions still applies.
Most economists expect sweeping tariffs of the kind Mr. Trump has proposed — including 25 percent levies on Mexico and Canada beginning this week — to raise consumer prices to some degree. Over time, they also think they will be detrimental to growth.
Against this backdrop, investors largely expect the Fed to lower rates twice more this year, or a total of half a percentage point, beginning in June. For his part, Mr. Powell has hinted at his support for additional rate cuts, characterizing the Fed’s current policy settings this week as “meaningfully restrictive,” or helping to keep a lid on inflation.
Ms. Bowman, who was appointed by President Trump, appeared to question that stance in her speech on Friday. She noted that financial conditions, which measure how easily companies can borrow and overall how well money flows throughout the economy, had eased overall. That, she said, had contributed to “the lack of further progress on slowing inflation,” she said.
“In light of the ongoing strength in the economy and with equity prices substantially higher than a year ago, it seems unlikely that the overall level of interest rates and borrowing costs are exerting meaningful restraint,” Ms. Bowman added.