Economic Outlook - February 2025
- The key measure of inflation used by the Federal Reserve, the Personal Consumption Expenditures Index known as the PCE, measured in line with expectations for December. The PCE rose 2.6% to close out 2024 and compares to the Federal Reserve’s long-target of 2%. While trends continue to improve, inflationary pressures remain sticky. PCE accelerated for the second straight month, increasing by 0.7%. Inflation has crept back into the mind of investors, and, despite significant progress, the persistence remains as monthly numbers continue to stay slightly above the preferred target.
- Over the last three quarters, the Federal Open Market Committee (FOMC) lowered interest rates a full percentage point. In the most recent January meeting, the Committee decided to halt rate cuts, leaving the overnight bank lending rate steady at the current target range of 4.25% – 4.50%. Federal Reserve Chair Jerome Powell cited the Committee pausing further rate declines due to a strong overall economy and pointed to better growth and robust labor markets, despite the persistence of certain inflationary factors. Other members of the Committee mentioned pausing, while taking a wait and see approach on inflation, which has declined nearly 3% since the peak in 2022. Thus far, the Fed has managed to orchestrate a soft landing for the economy that many deemed unlikely.
- The labor market remains well positioned and is a major factor in the Federal Reserve Board holding steady with rate cuts, despite some inflation remaining persistent. Unemployment remains around 4% with jobless claims declining to 207k in the last week of January, which is a sign of stability. Wage growth, as determined by hourly earnings, has steadily remained near 3% for many months. This can mute future inflationary pressures and is worth monitoring. This combination of factors is behind the Fed’s wait and see approach.
- In December, the U.S. economy showed signs of resilience, with Gross Domestic Product (GDP) growth showing continued strength, despite ongoing economic challenges. The final estimates for the quarter revealed a moderate yet steady expansion of 2.3% driven by solid consumer spending and business investment. We anticipate that both of these GDP contributors will remain robust for 2025. While the pace of growth declined slightly compared to prior months, it was in line with expectations and reflects a stable economic setting.
- After the US Dollar appreciated 10% last year, the strength of the currency has become a more frequently cited challenge to earnings and GDP growth. Since 2010, the dollar has seen a 40% increase in value. While currency movement is a contributor to growth dynamics economically, it moves the needle far less than factors such as interest rates or inflation. On the other hand, this shows global confidence in the U.S. economy versus other countries. Well over 40% of currencies are now pegged to the US Dollar, softening the effects of currency fluctuations.
Sources: Dow Jones Publishing, FactSet, Bloomberg, Bureau of Labor Statistics, U.S. Federal Reserve, Empirical Research Partners, Yardeni Research
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