Expectations of inflation also important
Weekly Bond Commentary
When “as expected” is good enough, markets tend to tread water. It’s when things go awry that they react more sharply.
Economic data and policy decisions last week were, on balance, within tolerance. The Federal Reserve meeting produced little new information, as the Fed made no change to the federal funds target range of 4.25-4.50%. Chair Powell reaffirmed the Fed’s independence as it continues to focus on its core mission of stable prices and full employment. The labor market has stabilized at solid levels, and he implied relatively more concern about inflation. In terms what comes next, it's hard to see the Fed in a hurry to cut rates, after it delivered 100 basis points of cuts in late 2024. In short, there is no urgent need for further easing: the economy continues to hum along, though with inflation slightly higher and uncertainty surrounding new administration policies.
Fourth quarter 2024 economic growth came in at 2.6%, down from 3.1% in the third quarter. Strong consumer spending was the main driver, while inventory investment was the slowest build in six quarters. The price component in the GDP report increased from 2.2% to 2.5%, consistent with the Fed’s preferred inflation measure of the Personal Consumption Expenditures Index, which rose from 2.4% to 2.6%. December personal income rose 0.4%, above November’s 0.3% gain, and consumer dipped into their savings to increase spending, from 0.6% higher in November, to 0.7% in December. So, 2024 ended with consumer spending powering a solid GDP advance.
Turning to January, however, consumers are feeling less upbeat, according to the Conference Board’s January survey. Their view of the present situation weakened the most, but their views of business conditions, their income, and future employment prospects all point to a more pessimistic take. Troublingly for the Fed, one-year forward inflation expectations increased from 5.1% to 5.3%, as references to inflation and prices continued to dominate responses, and more than half of respondents expect higher interest rates in the year ahead. Fewer respondents thought jobs were plentiful, and more said that jobs were hard to get. These responses are not exactly a seismic shift, but they do point in the wrong direction for further growth.