USD Inflation Interest Rates and Economic Policy Remain a Persistent Challenge

USD  inflation interest rates, and economic policy remain a persistent challenge. As 2024 closes, the interplay of these factors is shaping the USD’s trajectory amid a complex macroeconomic environment.
This week, the Federal Reserve’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) Index, is in focus, with expectations that core inflation will remain sticky.

Core Consumer Price Index (CPI) and Producer Price Index (PPI) readings have already demonstrated minimal progress towards the Fed’s 2% target, raising concerns about prolonged price pressures. Fed Governor Michelle Bowman has emphasized that the path toward price stability appears to have stalled.

Compounding these challenges, President-elect Donald Trump’s proposed economic policies, including broad-based tariffs, could introduce upward inflation pressure, potentially complicating the Fed’s roadmap for monetary easing.

Federal Reserve Policy: Rate Cuts Nearing an End?

The Fed has pursued a series of rate cuts in 2024, cumulatively reducing rates by 75 basis points. However, with inflation expectations on the rise and economic growth robust, policymakers may approach the limits of their rate-cutting cycle. Treasury yields, particularly on the 10-year note, have shown significant volatility, oscillating between 2.30% and projections of over 4.75% in early 2025.

The Fed must strike a delicate balance between fostering growth and controlling inflation. Any signs of sustained inflationary pressures or economic overheating could delay further easing or even prompt a policy reversal.

The U.S. economy remains resilient, supported by strong consumer spending and productivity gains. This strength has fostered a reflationary environment, favoring risk assets like equities, particularly small-cap and value stocks. Analysts anticipate continued market rallies into 2025, driven by solid fundamentals and investor sentiment.

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