Surging Stock Prices Amidst GDP and Inflation Data
The Federal Reserve's wait-and-see approach on interest rates gains traction as the recently released Q4 GDP report and anticipated inflation readings align with their cautious stance.
GDP Overview
The Q4 GDP report revealed a solid US economy despite a slightly lower-than-expected 2.3% annualized growth rate. However, analysts note positive signals, including a robust 4.2% consumer spending growth.
Fluctuations in trade and inventory accumulation impacted overall GDP: imports and exports declined by 0.8%, while slower inventory buildup subtracted 0.9% points. Volatility may stem from anticipation of Trump administration tariffs. Equipment investment declined by 7.8%, primarily due to aerospace-related strikes.
Inflation Concerns
Inflation remains a concern for policymakers as it stays elevated above the Fed's 2% target. December's "core" PCE is projected to remain at 2.8%, unchanged from November.
Fed's Cautious Approach
Fed Chair Jerome Powell emphasized their stance of caution amid uncertainties surrounding Trump administration economic policies. This cautiousness has led to a reduction in estimated rate cuts in 2025 from four to two.
Market Expectations
Economists continue to debate the likelihood of a March rate cut. Some believe it remains possible, citing persistent inflation pressures. However, others anticipate no cuts in 2025, with the next rate hike expected in 2026.
Trump Tariffs and Inflation
Analysts suggest that the potential 25% tariffs on Mexico and Canada could drive core PCE inflation up to 3%, reinforcing the Fed's wait-and-see approach as they assess the policy ramifications.