A new GDP report Thursday and the expectation of a sticky inflation reading Friday should reinforce the Federal Reserve’s new wait-and-see approach on interest rates.
Fed Chair Jay Powell outlined that approach Wednesday after the central bank decided to keep rates on hold, its first pause following three consecutive cuts at the end of 2024.
Policymakers are adopting a more cautious stance as they evaluate several unknowns about the economic policies of the new Trump administration.
"With our policy stance significantly less restrictive than it had been, and the economy remaining strong, we do not need to be in a hurry to adjust our policy stance," Powell said Wednesday.
The fourth-quarter GDP report released Thursday provided some evidence that the US economy capped off a surprisingly strong year in 2024.
While the headline number was softer than expected, showing the economy grew at an annualized pace of 2.3%, a deeper look at the report showed positive signs about the health of the US consumer, according to experts.
"The guts of the report were actually very strong," Deutsche Bank’s chief US economist Matt Luzzetti told chof360 Finance, pointing to stronger-than-expected consumer spending growth of 4.2%.
What was more volatile was the trade component of GDP. Both imports and exports fell by 0.8% annualized, and slower inventory accumulation subtracted 0.9% points from overall GDP growth.
Luzzetti posits that volatility may have been due to the anticipation of new tariffs from the Trump administration as retailers may have scrambled to stock up ahead of any new duties.
Equipment investment declined by 7.8%, but that weakness was mostly concentrated in aerospace, which could have resulted from a strike at Boeing during the fourth quarter. Those numbers could rebound in the first quarter of 2025.
"The US consumer has been unstoppable, supported by wealth creation, a strong labor market, and lending," said Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management.
Inflation, though, remains a concern for Fed policymakers, she added, with readings still above the Fed’s 2% target.
It is “still a bit too high for the Fed’s liking and the bar to a March rate cut is rising,” she added, referring to the central bank’s next meeting on March 18-19.
A new inflation report due out Friday from the Personal Consumption Expenditures (PCE) index, the Fed’s preferred gauge, may not do much to alleviate those concerns.
Economists expect annual "core" PCE to have clocked in at 2.8% in December, unchanged from November. Over the prior month, economists project "core" PCE rose 0.2%, faster than the 0.1% seen in November.
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In recent weeks, many Fed officials made clear they are increasingly concerned about signs of persistent inflation, citing that as a reason to move cautiously this year. In December officials scaled back the number of estimated cuts this year to two from four.
EY chief economist Greg Daco said he thinks a March cut is still possible.
"Despite a 'bump in the road' in Q4, inflation is still converging toward the Federal Reserve’s 2% target with minimal economic disruption,” he said.
"The Fed opted to hold rates steady in January but remains open to further policy easing if inflation convincingly and sustainably eases. We believe a March rate cut remains on the table."
But Luzzetti sees no cuts this year and believes the next move will be a rate cut in 2026.
If Trump does in fact slap 25% tariffs on Mexico and Canada, as he has threatened to do as early as this weekend, Luzzetti could see core PCE inflation rising to 3%.
"I think [that] really epitomizes why Chair Powell says the Fed isn't in a hurry and they want to see how these policies play out," he said.
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