5 reasons why the US Federal Reserve may leave interest rates unchanged in January

Although still above the Federal Reserve's target of 2%, inflation showed signs of cooling. Consumer prices edged 3.4% higher over the 12 months leading up to December, down from a peak of 7.1% in June 2022. The Fed's preferred inflation measure, the Personal Consumption Expenditures (PCE) price index, also showed a year-on-year increase of 2.6% in December 2023, softer than the 5.4% surge observed in the same period a year earlier. The central bank prefers the PCE index over other measures like the Consumer Price Index (CPI) because the PCE captures a wider range of expenditures and adjusts more quickly to changes in consumer behavior.

This slowdown in inflation rates, while still not within the ideal range, points towards less urgency for rate cuts.

Also Read: US consumer inflation moderates in November amid falling gas prices

Jobless claim applications were at 187,000 for the week ending January 13, down 16,000 from the week before and the fewest since September 2022, per an AP report. When considering the four-week moving average, which smooths out weekly variations, there was a decrease of 4,750 to 203,250 -- the lowest four-week average in almost a year.

This has been crucial in supporting robust consumer spending, which accounts for a significant portion of GDP. The combination of job gains and real wage increases has been a key driver of the current economic recovery.

This resilience could lead the Fed to reconsider or delay any plans for cutting interest rates, as doing so might fuel further economic overheating and potentially exacerbate inflationary pressures

The anticipation of potential rate cuts by the Federal Reserve has been reflected in the strong rally in equity markets, with S&P 500 gaining nearly 22% over the past year. However, such market movements and elevated valuations could potentially lead to an overheating economy. This could prompt the Fed to reconsider or delay planned rate cuts to prevent excessive inflation and maintain economic stability.

Also Read: US stocks close at a new record high as inflation expectations hit the lowest in over 3 years

The global economic outlook, including the policies of other major central banks like the European Central Bank and the Bank of England, plays a role in the Fed's decision-making. With global growth expected to slow and other major central banks maintaining higher rates, the Fed may choose to keep rates steady to navigate these international economic waters.