With GDP growth slashed on Friday and the latest inflation data still well above the Federal Reserve's long-term target, advisors are even less likely to see significant Fed rate cuts anytime soon.
U.S. real gross domestic product increased at an annual rate of 0.7% in the fourth quarter, according to data released by the Bureau of Economic Analysis, down from an increase of 4.4% in the third quarter. Real GDP was revised down 0.7 percentage point from the advance estimate, the BEA said, reflecting downward revisions to exports, consumer spending, government spending, and investment.
The latest Personal Consumption Expenditures price index was also released early Friday, and came in in line with expectations. PCE, which is the Federal Reserve’s preferred gauge of inflation, rose 0.3% in January from the prior month, and 2.8% from the same perid last year, according to the Bureau of BEA. Economists had expected PCE data to rise 0.33% in January from the prior month, and 2.9% from the same period last year, according to Barron’s, citing FactSet data.
The Core PCE price index, which excludes food and energy, rose 0.4% in January, in line with expectations, and 3.1% from a year ago, compared with expectations of a 2.9% increase, according to Barron's.
The PCE index is a measure of the prices that people living in the U.S., or those buying on their behalf, pay for goods and services.The BEA notes that the index is known for capturing inflation or defation across a wide range of consumer expenses and reflecting changes in consumer behavior.
The S&P 500 index ended Friday's session down 0.6%, while the Dow Jones Industrial Average shed 0.3%.
"Investors have a lot of economic data to digest this morning with the January PCE report and a revised fourth-quarter GDP reading," said eToro U.S. Investment Analyst Bret Kenwell, in a statement. "While CPI has underscored a stubborn but slowly improving inflation backdrop, PCE is sending a more troubling signal, with year-over-year inflation still sitting much closer to 3% than the Fed’s 2% target."
"Importantly, neither report reflects the recent spike in energy prices," he added.
Earlier this week, the latest Consumer Price Index data, another important metric for inflation, held steady and came in in line with expectations.
"This morning’s positive news on the year-over-year PCE price index, which dropped down to 2.8%, was partially offset by the disappointing news of Q4 GDP dropping from an initial estimate of 1.4% down to 0.7%," said Chris Zaccarelli, chief investment officer for Northlight Asset Management, in a statement.
All eyes are now on the Federal Reserve and what the latest economic data could mean for the prospect of rate cuts. In January the Federal Reserve kept its policy rate steady at 3.5% to 3.75%, despite coming under intense pressure from President Donald Trump to lower interest rates.
John Lloyd, global head of multi-sector credit and portfolio manager at Janus Henderson Investors says the PCE data underscore that inflation pressures remain elevated and are proving more persistent than policymakers would like. "The increase in inflation was broad‑based, spanning both goods and services categories," he said. "Looking ahead, risks to the inflation outlook remain skewed to the upside."
"The recent spike in oil prices introduces an additional source of uncertainty and raises the possibility that inflation could remain elevated for longer," Lloyd added. "Against this backdrop, the report complicates the Federal Reserve’s policy calculus. With inflation still running hot, the bar for cutting rates in the near term remains high."
The Federal Open Market Committee will hold its next meeting on March 17 and 18, with the Fed’s next policy announcement coming on March 18. The central bank is widely expected to extend its patient approach to rate cuts.
"The Fed is now looking at an environment where inflation remains sticky and will soon get an energy-fueled boost, while GDP growth and the labor market continue to lose momentum," said eToro's Kenwell. "That is not an easy setup for aggressive rate cuts unless the economy shows clearer signs of meaningful deterioration."
"Today’s economic updates add extra attention to next week’s Fed meeting and could make for a difficult balancing act for the incoming Fed chairman," he added.
Jeffrey Roach, chief economist at LPL Financial, also noted that the major downward revision to fourth-quarter growth complicates things for policy makers. "Underlying inflation pressures will continue to boil under the surface and next month’s print will also be elevated, impacted by the war in the middle east," he added, in a statement. "We expect the Fed to highlight the uncertainty on both sides of the mandate."
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