Slim chances of a cut fall again
Inflation held firm in December, keeping the Federal Reserve’s preferred gauge of price pressures stuck near 3% and reinforcing expectations that policymakers would keep rates unchanged at their next meeting.
The personal consumption expenditures price index rose 0.4% on the month and 2.9% year over year in December, according to the Bureau of Economic Analysis.
Core PCE, which strips out food and energy, also increased 0.4% on the month and 3.0% from a year earlier, leaving inflation well above the Fed’s 2% goal even as the pace of price growth cooled sharply from its 2022 peak.
Hotter PCE dims near term cut hopes
Both headline and core readings came in slightly above economists’ forecasts, echoing private estimates that warned of a firmer December print and a potentially stronger January number.
Rate futures told a similar story. Market pricing implied roughly a mid 90% chance that the Fed would leave its benchmark rate unchanged at the March meeting, according to tools tracking CME Fed funds contracts, with traders pushing back expectations for the first cut toward mid 2026.
Mixed data backdrop for housing and credit
The inflation data arrived alongside a modest 0.3% gain in personal income and a 0.4% increase in consumer spending, as households continued to lean on services while trimming outlays on goods. The personal saving rate held at 3.6%, underlining thin financial buffers for many borrowers.
Earlier in the cycle, softer PCE readings and cooling core inflation boosted Fed cut hopes and encouraged mortgage professionals to position for lower funding costs. In December, brokers similarly told Mortgage Professional America that even a modest Fed cut absolutely boosts buyer confidence by signaling that the worst of the rate pressure may be behind us, though they cautioned that mortgage rates did not always move in lockstep with the policy rate.
Slower growth, stubborn prices
Separate figures showed real GDP growing at a 1.4% annual rate in the fourth quarter, down sharply from 4.4% in the prior quarter, with analysts pointing to the autumn government shutdown as a key drag. For 2025 as a whole, the economy expanded 2.2%, supported by consumer spending and investment.
PCE inflation running above 2% would likely keep the Fed in a holding pattern and delay the timing of further rate cuts.
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