By Howard Schneider

WASHINGTON (Reuters)

At their last meeting in December, U.S. Federal Reserve officials were concerned about inflation staying above the 2% target, and were observing job gains fluctuate in what appeared to be an emerging decline.

When they convene on Jan. 28-29, the sentiment around the latest economic data will have shifted, offering renewed confidence that inflation will continue to decrease and further alleviating concerns regarding the job market.

The common economic caution of “all things being equal” may be particularly relevant given the uncertainty surrounding how new policies from the Trump administration might influence import prices, labor force size, and regulations.

Policies and market uncertainties have sharply increased since Trump’s election in November. However, recent data supports the majority of Fed officials who believe that both the job market and the economy are in healthy condition, with expectations that inflation will continue to decline in the coming months.

After reducing its benchmark interest rate by a full percentage point during the last three meetings of 2024, the Fed is anticipated to pause changes and maintain the rate in the 4.25%-to-4.50% range in January, as policymakers evaluate how much longer a “tight” monetary policy is necessary and how much they need to cut to achieve a “neutral” interest rate.

INFLATION SEEMS SET TO IMPROVE

The most recent Consumer Price Index report showed a slight increase in inflation for December, primarily due to fluctuating energy prices, which the Fed attempts to exclude from its analysis of core price trends.

Notably, the core inflation rate, which excludes food and energy prices, experienced a slight decrease. More crucially for the Fed, both the CPI and the components of the Personal Consumption Expenditures price index suggest a growth rate of approximately 2% annually through December, in line with the Fed’s target over a three-to-six month basis.

Furthermore, Fed officials are optimistic that data will favor their outlook this year. Given that inflation was unexpectedly high at the start of 2024, the upcoming months will reflect lower inflation rates as strong months from the previous year drop out of annual calculations, benefiting from “base effects” under all else being equal.

JOB GAINS STILL HOLDING UP

“Downside risks to the labor market appear to have diminished,” stated Fed Chair Jerome Powell after the December meeting. While acknowledging a cooling job market, he noted it remained “solid,” a scenario that the Fed aims to maintain.

Since that time, job data has remained consistent, with an estimated 250,000 jobs added in December and the unemployment rate dropping to 4.1%. This longevity in job gains provides further reassurance for officials to pause rate adjustments for now.