New GDP Report and Inflation Expectations Reinforce Fed's Wait-and-See Approach
Key Points:
* Thursday's GDP report suggests a strong end to 2024, despite a modest headline growth rate.
* Consumer spending remains robust, supported by wealth creation, employment, and credit.
* Inflation persists as a concern, with PCE inflation expectations unchanged in December.
* The Fed's next meeting (March 18-19) will provide further guidance on interest rates.
* Most Fed officials express caution due to inflation concerns, reducing estimated rate cuts to two this year.
* Some economists believe a March rate cut remains possible, while others anticipate a move in 2026.
* Trump's proposed tariffs on Mexico and Canada could exacerbate inflation.
Analysis:
The release of the fourth-quarter GDP report and the upcoming PCE inflation report bolster the Federal Reserve's recent decision to maintain interest rates. While the headline GDP growth rate fell short of expectations, positive consumer spending growth indicates a resilient economy.
However, inflation remains a concern, as it exceeds the Fed's target of 2%. The PCE inflation report is unlikely to provide relief, with economists projecting a continued upward trend.
Fed officials have expressed increased caution regarding inflation, citing it as a reason for proceeding gradually with rate adjustments. This has led to a reduction in projected rate cuts for 2025.
Despite the Fed's cautious stance, some economists believe a March rate cut is still feasible, pointing to potential economic disruption from the recent "bump in the road." Others, however, anticipate no cuts this year and view the next move as a rate hike in 2026.
The uncertainty surrounding the Trump administration's economic policies, including potential tariffs, further complicates the Fed's decision-making. The Fed is closely monitoring these developments and will likely incorporate them into their economic forecasts.