New GDP Report and Inflation Expectations Support Fed's Wait-and-See Approach

Thursday's GDP report and anticipation of persistent inflation in Friday's PCE index reinforce the Federal Reserve's decision to adopt a wait-and-see approach on interest rates. Fed Chair Jay Powell outlined this stance on Wednesday as the central bank opted to hold rates steady, following a series of three consecutive cuts in 2024.

GDP Report Highlights Consumer Strength

The Q4 GDP report released Thursday indicates a surprisingly strong close to the year for the U.S. economy. Despite a lower-than-expected headline growth rate of 2.3%, experts noted positive signs in consumer spending, which grew by 4.2%.

Trade Volatility and Equipment Investment

The volatility in the GDP trade component was attributed to potential anticipation of new tariffs by the Trump administration. Equipment investment declined by 7.8%, concentrated in aerospace due to a strike at Boeing. These sectors are expected to rebound in Q1 2025.

Inflation Concerns Persist

While the consumer economy remains strong, inflation remains a concern for the Fed, with readings above the 2% target. The PCE index, to be released Friday, is expected to show a core inflation rate of 2.8% in December.

Fed Officials Cautious

Recent statements by Fed officials indicate growing concern over persistent inflation, contributing to their cautious approach. Despite projections for two rate cuts in 2025, some analysts believe the Fed will maintain rates throughout the year.

Trade Tariffs and Inflation

If President Trump imposes 25% tariffs on Mexico and Canada, as threatened, core PCE inflation could rise to 3%. This uncertainty highlights the Fed's desire to monitor the impact of such policies before adjusting interest rates.

Market Impact

Investors are closely monitoring the latest economic data and Fed decisions, as they may affect stock prices and market sentiment. Stay tuned for in-depth analysis of financial and business news from Yahoo Finance.