Time for Fed to talk about rate cuts as US inflation cools

(Alliance News) - Analysts went back and forth on Friday about whether or not the US Federal Reserve should cut interest rates at its March meeting.

"It is hard to say which is more remarkable: that GDP growth accelerated last year following the Fed's most aggressive tightening campaign in decades, or that core inflation nevertheless fell back to the 2% target in annualised terms over the second half of the year. Either way, it is time for Fed officials to take the win and start dialling back the level of policy restrictiveness soon," said Andrew Hunter at Capital Economics.

US inflation pressure eased a touch at the end of last year, according to a reading on Friday, strengthening the case for the Federal Reserve to consider cutting interest rates.

According to the Bureau of Economic Analysis, the core personal consumption expenditure grew 2.9% year-on-year in December, easing from November's 3.2% rise. The core PCE reading, the Fed's preferred inflation gauge, fell to its lowest level since March 2021.

The outcome fell short of FXStreet-cited consensus, which predicted a lesser cool-down to 3.0%.

The core data excludes food and energy. The annual headline PCE index, which does not, grew 2.6%, in line with consensus and with the rate of expansion in November.

Analysts at ING commented: "The December personal income and spending report contains a number of interesting stories, but the obvious headline is that the US economy has been able to return inflation towards target in an environment of vigorous consumer spending growth. Something that is even more remarkable after a significant supply shock and during a period of ultra-low unemployment."

The PCE inflation data comes just days before the Fed's next meeting.

The Fed next decides on interest rates on Wednesday. The US central bank is expected to leave rates unmoved next week, but the question of what it will do in March is dividing opinion.

According to the CME FedWatch Tool, there is a 51% chance the central bank lowers the federal funds rate range in March from the current 5.25% to 5.50%.

Analysts at ING said: "Fed rate cuts are coming, but March still looks too early."

Data from the Bureau of Economic Analysis on Thursday showed US gross domestic product grew 3.3% quarter-on-quarter on an annualised basis in the three months to December 31. In the third quarter, GDP had grown by 4.9% on the same basis.

The latest figure came in ahead of consensus. According to FXStreet, annualised growth of 2.0% was expected.

Year-on-year, GDP grew 3.1% in the fourth quarter, picking up speed from a 2.9% rise in the third.

By Sophie Rose, Alliance News senior reporter

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