Rate cuts on Hold Amid Persistent Inflation and Slowing Consumer Momentum…
- Chair Powell and the Federal Open Market Committee announced today that they will hold the federal funds rate unchanged, marking the first policy pause since September. The decision follows three consecutive rate cuts, including December’s decrease, which revealed growing internal resistance. Two Fed governors, both appointed by President Trump, dissented against the decision and favored an additional quarter-point rate reduction.
- Going forward, the key question is when to resume cuts. The answer lies on which peril appears first, a weakening job market or inflation that convincingly resumes falling towards the Fed’s 2.0% percent target. While job growth has slowed sharply, unemployment has stabilized at around 4.4%. Meanwhile the clarity of recent inflation readings have been disrupted by the fall government shutdown. The committee is likely to require clearer evidence of economic deterioration to achieve a stronger consensus before resuming the interest rate easing cycle.
- Last week, the Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) Index, was belatedly released covering the combined period of October and November. The reading came in modestly above expectations with both headline and core inflation registering at 2.8% year-over-year versus consensus estimates of 2.7%. Markets showed little reaction, reflecting both the marginal nature of the upside surprise and the increasingly dated nature of the report. Attention now turns to the December PCE release, expected late next month, and which should provide a clearer assessment of inflation trends.
- Despite equity markets reaching record highs and economic growth accelerating, the Conference Board’s January consumer confidence survey had its lowest reading since 2014. Respondents cited persistent price pressures in everyday necessities such as groceries and gasoline, alongside ongoing uncertainty surrounding trade policy and labor-market conditions. Notwithstanding commentary from the Administration, many Americans are feeling financially stretched.
- Meanwhile, earnings season is now well underway with more than 65 S&P 500 companies having reported with ~75% having delivered earnings per share above analysts’ expectations, and broadly in line with historical averages. The quarter’s earnings growth rate stands at 8.2%, largely unchanged from initial estimates. If this trend continues, it would mark the tenth consecutive quarter of year-over-year earnings expansion and underscoring the resilience of corporate profitability despite tighter financial conditions and slowing economic momentum.