The Fed’s Favorite Inflation Indicator
Inflation eased slightly in January, with the Fed’s preferred measure, the personal consumption expenditures (PCE) price index, rising 0.3% for the month and 2.5% annually. Core PCE, which excludes food and energy, also increased 0.3% monthly and 2.6% annually, a step down from December’s 2.9% level. Personal income saw a sharp increase of 0.9%, but spending unexpectedly declined by 0.2%, leading to a higher personal savings rate of 4.6%. Markets reacted positively, with stock futures rising and Treasury yields falling, while traders slightly increased the likelihood of a Fed rate cut in June.
Early Indicators Showing Signs of Slowing Economy
According to the Atlanta Fed’s GDPNow tracker, early economic data for Q1 2025 suggests a 1.5% GDP contraction, driven by weak consumer spending and exports. This marks a sharp downgrade from the previous 2.3% growth estimate, reflecting declining consumer confidence and inflation concerns. Labor market weakness and an inverted yield curve further signal potential economic trouble, raising fears of a recession. In response, markets anticipate multiple Fed rate cuts, with traders raising the probability of a June cut to 80%.
Trump Tariff Plan Set to Take Effect
President Trump announced that his proposed 25% tariffs on Mexico and Canada will go into effect on March 4, alongside an additional 10% tariff on Chinese imports, bringing total U.S. tariffs on China to 20%. His statement contradicted earlier remarks from White House officials, who suggested tariff decisions would be made after an April 1 study. Trump justified the tariffs by citing concerns over illicit drug flows from Mexico and Canada, though he provided no evidence. Additionally, global 25% tariffs on steel and aluminum imports are set to take effect on March 12 as part of his broader trade policy.
