GDP Growth and Inflation Concerns Bolster Fed's Wait-and-See Approach
The release of the fourth-quarter GDP report and the anticipation of a high inflation reading in the Personal Consumption Expenditures (PCE) index on Friday reinforce the Federal Reserve's cautious stance on interest rates.
GDP Growth:
The GDP report indicated a strong finish to 2024, with an annualized growth rate of 2.3%. Experts note positive signs of consumer spending (4.2% growth), suggesting continued economic momentum. However, trade volatility due to potential tariffs and weakness in equipment investment remain concerns.
Inflation:
Inflation remains a concern for policymakers, with core PCE inflation projected at 2.8% in December. This is above the Fed's 2% target, raising concerns that inflation may be more persistent than expected.
Fed's Approach:
Based on these factors, the Fed has adopted a more cautious approach, pausing interest rate adjustments. Chair Jay Powell has stated that the central bank is in no rush to alter policy due to its less restrictive stance and the economy's continued strength.
Market Outlook:
Economists predict that a March rate cut is unlikely, with many expecting the next move to be an increase in 2026. Potential tariffs on Mexico and Canada could further elevate inflation, prompting the Fed to remain vigilant.
Conclusion:
The GDP report and inflation expectations underscore the Fed's wait-and-see approach, emphasizing the need to assess the impact of economic policies and ensure sustained economic growth while addressing inflation concerns.