Fed inflation gauge upends rate cut bets heading into 2025

The Federal Reserve’s preferred inflation gauge held steady again last month, data indicated Friday, but a big jump in personal spending into the end of the year continues to suggest elevated pressures and a lack of ‘last mile’ progress from Chairman Jerome Powell and his colleagues on the rate-setting committee.  

The Bureau of Economic Analysis’ PCE Price Index report for the month of December showed core prices rising at an annual rate of 2.8%, matching the November reading and Wall Street’s consensus forecast.

Core pressures, which strip away volatile food and energy prices, were up 0.2% on the month, compared with November’s 0.1% gain and Wall Street’s consensus estimate of 0.2%.

Markets focus on the core PCE inflation reading, which the Fed considers a more accurate representation of overall price pressures as it incorporates changes in consumer spending patterns.

The BEA’s headline PCE inflation index quickened to an annual rate of 2.6%, matching Wall Street’s estimate but slightly above the 2.4% pace recorded in November. The BEA said prices were up 0.3% on the month, following a 0.1% reading in November.

The BEA also noted that personal incomes for December rose 0.4%, rising from the unrevised 0.3% pace in November, while spending accelerated 0.7% compared with the 0.4% advance over the prior month.

U.S. stocks were little-changed following the data release, with futures indicating a 21-point opening bell gain for the S&P 500 and a 105-point advance for the Dow Jones Industrial Average. The tech-focused Nasdaq is called 140 points higher.

Benchmark 10-year note yields were 2 basis points higher at 4.539% following the data release, while 2-year notes rose 1 basis points to 4.218%.

The U.S. dollar index, which tracks the greenback against a basket of six global currencies, was marked 0.39% higher at 108.217.

Inflation pressures remain stubbornly above the Fed’s stated 2% target, with the December CPI pegged at an annual rate of 2.9%, the highest of the year, even as domestic gasoline prices declined 1.1%.

Related: Fed decision cements interest rate case

Core inflation, however, eased for the first time since July, and was pegged at 3.2%, in what some analysts and investors saw as an early indication that the Fed could resume its policy easing into the new year.

December retail sales were also mixed, with headline activity rising 0.4% to a collective tally of $729.2 billion, while the closely tracked control-group number, which feeds into the government’s GDP calculations, rose 0.7%

However, recent economic data suggest slowing growth momentum into the new year.

More Economic Analysis:

• Major fund manager reveals stock market forecast for 2025
• Surprising December retail sales report upends inflation bets
• Jobs report has big implications for Fed rate bets, Treasury yields

Earlier this week, Federal Reserve Chairman Jerome Powell said the central bank is in “no hurry’ to lower its benchmark lending rate, which it held at 4.375% following a two-day policy meeting in Washington, adding that the economy remains “in quite a good place”.

When asked about the impact of President Donald Trump’s tariff, tax and immigration policies, as well as his “demand” for lower interest rates, Powell would only say that the central bank would operate within the existing rules.

“We are, like others, we’re reviewing the orders and the associated details as they are made available, and as has been our practice over many administrations, we are working to align our policies with the executive orders as appropriate and consistent with applicable law,” Powell said.

Related: Veteran fund manager issues dire S&P 500 warning for 2025

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