The Fed's Wait-and-See Approach Amid Economic Uncertainties
Robust GDP Report Amidst Inflation Concerns
The recently released fourth-quarter GDP report signaled a strong conclusion to 2024, despite a lower-than-anticipated 2.3% annualized growth rate. Consumer spending remained resilient, growing at an impressive 4.2%, according to Deutsche Bank's chief US economist Matt Luzzetti. However, trade volatility and inventory accumulation hindered overall growth.
Federal Reserve's Cautious Stance
Federal Reserve Chairman Jay Powell emphasized the central bank's cautious approach, stating that current interest rate levels are less restrictive and the economy remains robust. The Fed's wait-and-see approach is influenced by uncertainties surrounding the Trump administration's economic policies.
Inflation Pressures Remain
Inflation remains a concern for policymakers, with core PCE inflation projected to remain unchanged at 2.8% in December and a slight increase expected in the January reading. Fed officials have expressed concerns about persistent inflation, contributing to a reduction in estimated rate cuts this year.
Market Expectations
Analysts have varying perspectives on the probability of a March rate cut. Greg Daco, chief economist at EY, believes it's still possible due to inflation converging towards the Fed's target. However, Matt Luzzetti anticipates no cuts this year and projects a rate hike in 2026. Potential tariffs on Mexico and Canada could exacerbate core PCE inflation, underscoring the Fed's cautious approach.