GDP and Inflation Data to Reinforce Fed's Wait-and-See Approach

The release of the fourth-quarter GDP report and the anticipation of a stable inflation reading on Friday are anticipated to solidify the Federal Reserve's cautious stance on interest rates. Fed Chair Jay Powell emphasized this approach on Wednesday, stating that the central bank "do not need to be in a hurry to adjust our policy stance."

GDP Growth Surprises

The GDP report indicated that the US economy concluded a remarkably strong 2024. While the headline number fell short of expectations, showing a 2.3% annualized growth rate, a closer examination revealed positive indicators for consumer health. Deutsche Bank's chief US economist attributed the strong consumer spending growth of 4.2% as a key driver of the report's strength.

Trade Volatility and Investment Declines

Notably, the trade component of GDP exhibited volatility, with both imports and exports experiencing 0.8% annualized declines. Slowing inventory accumulation also contributed to a 0.9% reduction in overall GDP growth. Experts suggest that this volatility may be attributed to the anticipation of new Trump administration tariffs, causing retailers to stockpile ahead of potential price increases. Despite a 7.8% decline in equipment investment, which was primarily concentrated in the aerospace sector, economists anticipate a rebound in the first quarter of 2025.

Consumer Strength and Inflation Concerns

The report highlighted the resilience of the US consumer, supported by wealth creation, a robust labor market, and lending. However, inflation remains a concern for Fed policymakers, with readings still exceeding the Fed's 2% target. The upcoming PCE inflation report on Friday is expected to maintain elevated levels, further supporting the central bank's cautious approach.

Fed's Options and Market Impact

While economists see the possibility of a March rate cut, others believe the next move will be in 2026. The impact of potential 25% tariffs on Mexico and Canada remains a key factor in the Fed's decision-making. The markets will closely monitor these developments for insights into the Fed's future policy actions.