Economic Outlook - January 2025
- More uncertainty surrounds Fed monetary policy after the recent Federal Open Market Committee (FOMC) meeting, which spooked Wall Street. The Fed’s December 18th rate cut announcement revealed disagreement within the FOMC over how the U.S. economy is doing, and whether many more key interest rate cuts are necessary. More data is needed to determine whether U.S. inflation is reaccelerating. The December FOMC statement and “dot plot” signaled that the Fed is pivoting from focusing on unemployment back to controlling inflation. The signals point to the Fed pausing after two more rate cuts in 2025 — down from the four rate cuts foreseen in the U.S. central bank’s previous dot plot. There is no clear consensus among the Committee for the benchmark fed-funds rate. Rate estimates ranged from 3.1% to 3.9% in 2026 among top Fed officials.
- Until a few months ago, inflation seemed to be closing in on the Fed’s 2% target. The central bank’s preferred inflation barometer, the Personal Consumption Expenditures Index (PCE), slowed to a 3½-year low of 2.1% in September, down from a 40-year peak of 7.3% in 2022. Yet several higher-than-expected monthly price reports have pushed the annual inflation rate back up to 2.4% as of November. Fed officials suspect that inflation will be higher at the end of 2025 than in 2024. Officials raised their estimate for 2025 to 2.5%.
- The core PCE index, excluding food and energy, rose just 0.1% in November and has increased by 2.8% over the past 12 months. The November PCE spike signifies the smallest monthly change since May of 2024. When shelter costs are stripped out of the PCE, inflation is essentially running at the Fed’s 2% target rate.
- In 2024, businesses laid off workers at one of the lowest rates in decades despite lingering inflation concerns and the highest interest rates in years. The number of Americans who applied for unemployment benefits the week before Christmas slipped to a four-week low of 219,000. New jobless claims have hovered in the low 200,000s for the better part of the last three years. Most businesses have enough demand to hold onto existing staff and they are unwilling to cut jobs amid a persistent labor shortage. Although layoffs are low, businesses are no longer as quick to hire.
- Consumer spending, the main engine of the economy, has powered two quarters of 3% growth while the final three months of 2024 are looking slightly softer at 2.6%, according to the Atlanta Fed GDPNow estimates. Holiday sales from November through Christmas Eve climbed 3.8%, outpacing the 3.1% increase from a year earlier, according to Mastercard SpendingPulse, which tracks payments including cash and debit cards. The last five days of the season accounted for 10% of consumer spending. Looking out 12 months, GDP growth appears strong, although Trump’s threatened trade tariffs remain a wild card.
- Spending has been supported by rising inflation-adjusted incomes, low unemployment and, until recently, a surging stock market that’s been a big boon to stock investors. The savings rate, meanwhile, slipped to 4.4% from 4.5%. Although it’s a bit lower than normal, household savings appear to be high enough to promote steady spending.
Sources: FactSet, Board of Governors of the Federal Reserve System, U.S. Department of Commerce, Federal Reserve Bank of St. Louis, U.S. Department of Labor
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