The Federal Reserve could restart cuts to short-term borrowing rates in June and follow up with another reduction in September, traders bet on Friday, after data showed inflation edged down in January in line with expectations.
The 12-month change in the personal consumption expenditures price index, which the Fed targets at 2%, ticked down to 2.5% last month from 2.6% in December, and the core PCE measure fell to 2.6% from 2.9%, the Commerce Department's Bureau of Economic Analysis showed.
The same report also showed consumer spending unexpectedly dropped in January, following a sharp increase in December as households stocked up on goods ahead of the Trump administration's telegraphed tariffs, which have stoked rising fears of a resurgence in price pressures amid a slowdown in business activity.
The combination of still-elevated inflation and cooling economic growth has some analysts worried that Fed policymakers may need to choose between their two goals of price stability and full employment, and could potentially keep rates higher for longer to beat inflation only to see the jobs picture deteriorate.
"The Fed now has a lot of worrying to do," said Peter Cardillo, chief market economist at Spartan Capital Securities.
Fed policymakers themselves say they are focused on the data to be released over the next couple of months and on assessing the actual economic fallout of Trump's policies, including a 25% levy on imports from Mexico and Canada set to start next week, along with an increase to tariffs on China. It's unclear, they say, how much of those higher rates will be passed on to consumers in the form of higher prices, and on how they will impact economic growth more broadly.
None have signaled any inclination to cut the policy rate, currently in the 4.25%-4.50% range, when they meet next month, and at least a few -- including Fed Governor Adriana Kugler and Cleveland Fed chief Beth Hammack -- say rates could stay where they are for some time unless there is an unexpected increase in the unemployment rate, which last month dropped to 4%.
Fed Chair Jerome Powell is expected to give his own updated view on the economic and policy outlook next Friday, when the government will also release its monthly employment report for February.
