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Weekly Update 01/31/2025: Fed Keeps Rate Unchanged

Insights
  • U.S. GDP grows steadily
  • PCE data in line with expectations

Fed Meeting

The Federal Open Market Committee voted unanimously to keep the federal funds rate target, its main monetary policy tool, in a range of 4.25%-5.00% as expected. There were some minor changes to the policy statement that accompanied the news of the vote. In the previous statement, the Fed said that “inflation has made progress toward the committee’s two percent objective.” The sentence in the most recent statement reads: “Inflation remains somewhat elevated.” That suggests that there is indeed a shift in the thinking of Fed governors. After three consecutive meetings which saw a cut in the target, a pause is in effect for now and may be for some time. With interest rates now “significantly less restrictive” than they were before last year’s cuts, “we do not need to be in a hurry to adjust our policy stance,” said Fed Chairman Jerome Powell at a post-meeting news conference. With seven meetings left in calendar 2025, only June’s get together is showing a greater than 50% chance of a cut according to the latest futures markets.

The key factor continues to be inflation. Chairman Powell’s comments at that post-meeting news conference were a bit more ‘dovish’ than the statement. “We seem to be set up for further progress” on inflation, he said. Being set up for progress is one thing, “but having it is another.” Which means the Fed will focus on the data it receives to make its decisions. President Trump wants rates reduced now, but it is unlikely he will get his way. “As I’ve said countless times over the years, this is who we are, this is what we do,” Powell said. “Don’t look for us to do anything else.” Similar to Trump’s last term in the White House, it seems that there will be an ongoing battle of wills where Trump will make a proposal, and Powell will deflect it. In response to many questions about tariffs and immigration, Powell said that more information is needed before any plausible assessment can be made. While Powell may offer a nuanced view, many of the Fed’s own staff and other governors have already incorporated higher prices into their projections. We will find out if that comes to pass or not, but, for now, the Fed can stand still because the economy has been growing.

U.S. GDP

In 2024, the value of all goods and services produced domestically rose 2.5% according to the Commerce Department. Though that was slower than the 3.2% pace in 2023, it was still a solid expansion for the world’s largest economy. However, growth did slow slightly during the fourth quarter, rising at a 2.3% seasonally and inflation adjusted annual rate. That was down from the 3.1% pace in the third quarter. Uncertainty surrounding the election and hurricane activity can be attributed for some of the slowdown, but a positive holiday selling season and steady consumer confidence were notable positives. While many predicted gloom and doom for 2024, the economy for the most part achieved the coveted “soft landing” the Fed was looking for. Unemployment averaged a low 4%, income gains helped household wealth and inflation eased without quite being eliminated. While the level of some items remains high, the rate of change has softened which is part of the Fed’s mandate. It is quite unlikely they will feel the need to cut interest rates if such broad growth continues, but we will see.

Personal Income, Consumer Spending and Labor Costs

The Bureau of Economic Analysis (BEA) released data for December which showed inflation remained tame in December but did not make much progress towards the Fed’s underlying goal. The personal consumption expenditure (PCE) index, rose 0.3% for the month, which was in line with estimates. On a yearly basis, that translated into a 2.6% gain from December of last year. Excluding food and energy items, the so-called core PCE rose a smaller 0.2% month-to-month, translating into a 2.8% year-over-year increase. Both of those figures matched what the consensus was in a survey of economists by Bloomberg. On a three-month annualized basis, core PCE advanced a modest 2.2%, the least since July of last year suggesting that the trajectory of inflation was moving in the right direction. However, there just is not enough evidence yet to show that inflation is making sustainable progress toward the Fed’s 2% target. Until that happens, the Fed is unlikely to resume lowering borrowing costs. Core goods prices, which exclude food and energy and focus on just the goods categories in the PCE report, fell 0.24% last month, the most in a year. Conversely, core services price, which excludes housing and energy categories, rose 0.3% from November, similar to readings in prior months. As Chairman Powell mentioned many times before, reaching that 2% goal is going to be challenging.

The BEA report also showed personal income rising 0.4% in December versus a 0.3% rise in November. Strong hiring and wage growth drove results in that category. Personal spending meanwhile accelerated to 0.7% versus an upwardly revised 0.6% in November. The consensus for spending was only for a 0.5% gain, showing that consumers definitely enjoyed the holiday shopping season. Whether that was to potentially stockpile goods before price increases from tariffs remains to be seen. That spending drove the personal savings rate down to 3.8%.

In a separate report from the Bureau of Labor Statistics, the quarterly employment cost index (ECI) for the final quarter of 2024 rose 3.8% from the same period in 2023. This suggests that labor cost growth cooled year-over-year. Monthly reports like hourly wages have shown growth throughout the year, but the ECI also includes benefits in its calculations, which is an important line item to businesses as they contemplate hiring. The ECI is also favored by economists because it is not distorted by shifts in the composition of employment among occupations or industries. Similar to the PCE figures, the ECI numbers showed more strength in employment costs at service providers versus labor cost growth at goods producers.

The debate over the health and direction of the labor market will continue next week as the monthly jobs report from the Labor Department is due in a week. The consensus expectation is for non-farm payroll growth of 150,000 in December compared to the 256,000 gain in November which surpassed many estimates at the time. The unemployment rate is expected to hold steady at 4.1%, which is still low in a historical context. Tune in next week for our in-depth analysis!

Company Events

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