The January Meeting
The PCE Inflation index began to rise from September 2024, the very month in which the Federal Reserve (the “Fed”) began cutting rates. December’s figure reached 2.6%, the highest reading since April that year. Core PCE inflation (excluding Food and Energy) reached 2.8% (later revised upwards to 2.9%). These higher readings suggested that inflation might be stickier than expected, if not resurgent.
The meeting minutes, accordingly, show a clear change in mindset, with some commentators even describing the tone as “hawkish”.[1] Inflation risks were perceived as “skewed to the upside” owing to the persistence of core inflation and the unknown impact of trade policy.
The topic of liquidity management and the future path of Quantitative Tightening (QT) was also discussed. It seems possible that the Fed will begin to slow or pause the tightening process in the Spring, in line with the mid-2025 debt ceiling deadline and concerns over banking reserves, which are nearing $3 trillion, close to the “ample reserves” threshold.
The Latest Data
The latest CPI inflation figures, updated on February 12th, appeared to reinforce the view that inflation may be back on an upward path, rising for the fourth consecutive month to 3% (compared with 2.4% in September). The most recent PCE figures however, released on February 28th, show a more benign picture, with both Headline and Core figures down from December’s readings, at 2.5% and 2.6% respectively.
The overall economic situation also appears solid, with GDP growth of 2.3% for the 4th quarter (2.8% overall for 2024),[2] and unemployment edging down to 4.0%.[3]
One jarring note in the data, pointed out in various commentaries, is the drop in personal spending, which fell by 0.2% in January, the fastest drop in four years when adjusted for inflation (-0.5%).[4] After growth of 0.7% in December, this raises the question of whether consumers are beginning to get nervous.
This mixed data—solid growth yet spending weakness—reinforces the Fed’s cautious ‘wait and see’ stance, and has been corroborated by recent statements from Fed officials.[5]
The View from the Markets
With definitive data comparatively sparse, the market has little to do but speculate about the future. The three main items of concern are trade, immigration, and fiscal policy, all of which depend to a great extent on the decisions of the current U.S. administration under President Trump, whose actions are less easy to predict than many other world leaders.
Tariffs on Chinese imports, along with steel and aluminum, are already in effect, while those on Canada and Mexico are in what might be called a state of flux.[6] While further clarity is hoped for on April 2nd, where details on tariffs for other trading partners are set to be revealed, the language of the administration suggests nothing should be regarded as fixed, as tariffs are as much a geopolitical tool as they are a purely economic measure.[7]
Meanwhile, everyone - including the Fed - is waiting to see what form the Trump administration’s efforts towards achieving budget sustainability will take. The centrality of tax cuts, combined with somewhat vague commitments on reining in government spending, make for a tangled skein.
Markets are more or less certain that the coming meeting will see rates held where they are, with a consensus emerging (as of the time of writing) that there will likely be three cuts this year.[8]
Conclusion
The coming year will prompt many important discussions about the future of the U.S. economy and its financial system. For instance, a new congressional panel is being set up to examine the role of the Fed, and whether it should be more focused on inflation as opposed to having multiple mandates.[9] Ultimately, it is trends like these that determine the long-term future of the markets.
Having a long-term view makes it possible to focus on a small number of high-impact macro trends, rather than getting caught up in the innumerable, ephemeral imponderables that crowd in via the news feed daily. It also makes for an investment portfolio that is robust to short-term volatility and flexible enough to adapt to the unexpected.
[2] Bureau of Economic Analysis