Inflation and the Fed in 2024
Inflation in the United States showed signs of moderation in 2024, with the personal consumption expenditures (PCE) price index rising just 0.1% in November and 2.4% annually—slightly above the Federal Reserve’s 2% target. The core PCE, which excludes volatile food and energy prices, also rose 0.1% for the month and 2.8% annually, both measures coming in below market expectations. While goods prices were relatively flat, services increased modestly by 0.2%, and housing inflation appeared to ease, with a 0.2% rise.
The Federal Reserve recognized this progress toward its inflation objectives but maintained a cautious stance on future policy adjustments. Chair Jerome Powell stated the Fed does not predict potential policy changes and their effects on inflation when forecasting rate cuts in 2025. The Federal Reserve cut rates three times in 2024, with the cut in December by .25 percentage points. This adjustment reflects efforts to balance persistent inflation pressures with solid economic growth.
The Fed projected GDP growth of 2.5% for 2024 but anticipates a gradual economic slowdown and slightly higher-than-target inflation in the coming year. This outlook has prompted a restrained approach, with Chair Powell signaling the potential for only two additional rate reductions in 2025 while stressing the importance of evaluating fiscal policy impacts.
Financial markets reacted sharply to the Federal Reserve’s decisions and projections. Stocks have fallen since the acceleration in stock market prices following the election. Treasury yields climbed, signaling skepticism about the Fed’s ability to sustain rate cuts amid evolving economic dynamics. This year’s developments underscore the complexities of achieving price stability while fostering sustainable economic growth.
US Election and Policy Expectations
In a significant political shift, voters elected former President Donald Trump in the November 2024 presidential election. Trump, representing the Republican Party, defeated Democratic nominee Kamala Harris, who faced substantial criticism over inflation and government spending, particularly on foreign military aid. Harris, who served as Vice President under President Joe Biden, campaigned in a political landscape dominated by voter concerns over inflation, immigration, and the economy.
President-elect Trump’s proposed policy agenda focuses on strict immigration changes, including securing the U.S.-Mexico border and implementing mass deportations. These measures aim to prioritize jobs for American citizens, which he claims have been taken by undocumented immigrants. However, significant challenges accompany such initiatives, including the high costs of enforcement and the potential economic impact on industries reliant on immigrant labor. Key sectors such as agriculture and home construction, heavily dependent on this workforce, may face severe labor shortages, potentially driving up costs and prices.
Trump’s agenda also includes deregulation across various industries, a move that has already buoyed financial markets. Following his election victory, bank stocks and wirehouses experienced notable gains, signaling optimism about increased mergers and acquisitions activity. Such trends could benefit large financial institutions and their private lending operations.
A cornerstone of Trump’s economic plan is imposing tariffs on countries with significant trade imbalances with the United States, such as China and many EU countries. These tariffs aim to incentivize domestic manufacturing and reduce reliance on foreign imports. However, the policy carries inherent risks, including inflationary pressures resulting from higher costs of U.S.-produced goods compared to imports. Such tariffs could strain consumers, particularly in sectors where domestic manufacturing struggles to match the efficiency and cost of international producers.
The interplay between President-elect Trump’s policies and their potential economic consequences will be critical for the Federal Reserve’s monetary policy shifts. The central bank will closely monitor inflationary risks and the broader economic impact of these measures, particularly the possibility of stagflation—a combination of slow economic growth and high inflation. Trump’s pro-business platform, while appealing to certain sectors, introduces economic complexities that will shape both fiscal and monetary policy in the coming years.
