Tag: Federal Reserve

Trump’s Powell Threat Rattles Wall Street, Ignites Flight from U.S. Assets

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– Stocks and the U.S. dollar dropped as markets reacted to Trump’s threat to remove Fed Chair Jerome Powell.
– Concerns over Fed independence sparked a flight from U.S. assets into gold and foreign bonds.
– Investors fear increased volatility, weakening confidence in the dollar and U.S. monetary policy.

On Monday, April 21, 2025, U.S. financial markets experienced significant volatility following President Donald Trump’s renewed criticism of Federal Reserve Chair Jerome Powell. Trump’s public suggestion that he may attempt to remove Powell has heightened concerns about political interference in monetary policy — a cornerstone of market confidence. The S&P 500 dropped over 1%, while the Bloomberg Dollar Index fell to a 15-month low. Treasury yields jumped, pushing the 10-year above 4.4%, reflecting the market’s unease with rising inflation risk and a potentially less independent Fed.

At the same time, investors poured into safe-haven assets. Gold surged to a record above $3,400 an ounce, while the Swiss franc and Japanese yen rallied. The sharp movements signal not just a knee-jerk reaction to headlines, but deeper anxiety over the future of monetary policy. Analysts have warned that undermining the Fed’s credibility could cause long-term damage to the dollar’s global reserve status and complicate the central bank’s ability to steer the economy during periods of stress.

Markets are now on edge over the prospect of a politicized Federal Reserve. National Economic Council Director Kevin Hassett confirmed that Trump is reviewing the legality of removing Powell — a move seen by many as extreme and historically unprecedented. While legal scholars argue the president lacks the authority to fire the Fed Chair without cause, the noise alone has proven enough to shake investor confidence. Fed officials have maintained a measured tone, but Chicago Fed President Austan Goolsbee warned over the weekend that undermining central bank independence is a dangerous path.

For small and micro-cap investors, the ripple effects are particularly pronounced. These companies typically have tighter margins, higher debt costs, and fewer international buffers than large-cap peers. In a rising rate or inflationary environment — or worse, one with erratic policy signals — smaller firms can see financing dry up and market multiples compress rapidly. Investors focused on this space should be watching both policy headlines and macroeconomic indicators closely, as volatility may linger longer than anticipated.

Adding to market pressure, geopolitical tensions have grown. Reports that Chinese investors are reducing U.S. Treasury holdings in favor of European and Japanese debt point to an early-stage shift in global capital allocation. If trust in U.S. governance continues to erode, further capital outflows could strain markets even more. At the same time, the White House’s ongoing tariff disputes are reshaping trade routes and disrupting sectors from tech to commodities. All of this contributes to an environment where capital seeks safety — and where policymaker credibility is paramount.

This shifting market sentiment could have meaningful implications for small-cap stocks, particularly those tracked by the Russell 2000. As investors rotate away from large-cap tech and U.S. dollar-denominated assets, the Russell’s reconstitution later this year may spotlight high-quality domestic companies with strong fundamentals and less exposure to geopolitical volatility. For savvy investors, this uncertainty could ultimately shine a light on overlooked small-cap opportunities poised to benefit from changing capital flows and renewed interest in U.S.-focused growth stories.

Powell Flags Fed’s Tariff Dilemma: Inflation vs. Growth

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– Powell warns new tariffs may fuel inflation and slow growth simultaneously.
– The Fed will wait for clearer signals before changing its policy stance.
– Pre-tariff buying and uncertain trade flows may skew short-term economic indicators.

Federal Reserve Chair Jerome Powell warned Wednesday that the central bank may face difficult trade-offs as new tariffs raise inflationary pressure while potentially slowing economic growth. Speaking before the Economic Club of Chicago, Powell said the U.S. economy could be entering a phase where the Fed’s dual mandate—price stability and maximum employment—may be in direct conflict.

“We may find ourselves in the challenging scenario in which our dual-mandate goals are in tension,” Powell said, referencing the uncertainty surrounding President Trump’s sweeping tariff policies. The White House’s new duties, which could raise prices on a wide array of imports, come just as economic data begins to show signs of cooling.

Powell noted that if inflation rises while growth slows, the Fed would have to carefully assess which goal to prioritize based on how far the economy is from each target and how long each gap is expected to last. For now, Powell indicated that the central bank would not rush into policy changes and would instead wait for “greater clarity” before adjusting interest rates.

Markets took his remarks in stride, though stocks dipped to session lows and Treasury yields edged lower. The Fed’s next move is being closely watched, especially as futures markets still price in three or four interest rate cuts by year-end. But Powell’s comments suggest the central bank is in no hurry to act amid so many moving pieces.

Trump’s tariff agenda has added complexity to the economic outlook. While tariffs are essentially taxes on imported goods and don’t always lead to sustained inflation, their scale and scope this time are different. The president’s moves have prompted businesses to front-load imports and accelerate purchases, especially in autos and manufacturing. But that activity may fade fast.

Recent retail data showed a 1.4% increase in March sales, largely due to consumers rushing to buy cars before the tariffs take hold. Powell said this kind of short-term behavior could distort near-term economic indicators, making it harder for the Fed to gauge the true health of the economy.

At the same time, Powell pointed out that survey and market-based measures of inflation expectations have begun to rise. While long-term inflation projections remain near the Fed’s 2% target, the upward drift in near-term forecasts could pose a problem if left unchecked.

The GDP outlook for the first quarter reflects this uncertainty. The Atlanta Fed, adjusting for abnormal trade flows including a jump in gold imports, now sees Q1 growth coming in flat at -0.1%. Powell acknowledged that consumer spending has cooled and imports have weighed on output.

The speech largely echoed Powell’s earlier comments this month, but with a sharper tone on trade policy risks. As the Fed walks a tightrope between inflation and growth, investors are left guessing how long it can maintain its wait-and-see posture.

U.S. Inflation Slows to 2.4% in March, Core Rate Hits Four-Year Low Amid Tariff Uncertainty

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– U.S. inflation fell to 2.4% in March, below expectations, with core inflation hitting a four-year low at 2.8%.
– A steep drop in energy prices and moderating shelter costs helped keep inflation contained.
– Markets remain cautious as future inflation data may reflect new tariffs still under negotiation.

Inflation in the United States cooled more than expected in March, offering a temporary reprieve to consumers and policymakers alike. According to data released Thursday by the Bureau of Labor Statistics, the Consumer Price Index (CPI) fell by 0.1% on a seasonally adjusted basis, bringing the 12-month inflation rate to 2.4%. That’s a notable drop from February’s 2.8% pace and well below Wall Street’s expectations of a 2.6% rise.

Core inflation, which excludes volatile food and energy categories, increased just 0.1% for the month. On an annual basis, core CPI is now running at 2.8% — its lowest level since March 2021. The data arrives at a pivotal moment, as the White House recalibrates its tariff strategy and the Federal Reserve weighs the timing of future rate cuts.

Energy prices played a major role in the softer inflation print. Gasoline prices slid 6.3% in March, driving a 2.4% overall drop in the energy index. Meanwhile, food prices remained a source of upward pressure, climbing 0.4% during the month. Egg prices, in particular, continued to surge — rising nearly 6% month-over-month and up more than 60% year-over-year.

Shelter costs, historically one of the stickiest inflation categories, also moderated. The index for shelter rose just 0.2% in March and was up 4% over the past year, the smallest annual increase since late 2021. Used vehicle prices declined by 0.7%, and new car prices ticked up just 0.1%, as the auto industry braces for the potential impact of upcoming tariffs.

Other notable categories showed price relief as well. Airline fares dropped by over 5% on the month, and prescription drug prices declined 2%. Motor vehicle insurance — which had been trending higher — dipped by 0.8%, offering additional breathing room to consumers.

Despite the favorable inflation data, market reaction was mixed. Stock futures pointed to a lower open on Wall Street, and Treasury yields slipped as investors weighed how this report would influence the Fed’s interest rate trajectory. Traders are still pricing in the likelihood of three to four rate cuts by the end of 2025, with expectations largely unchanged following the release.

The inflation report comes just a day after President Trump surprised markets by partially reversing his hardline tariff stance. While the administration left in place a blanket 10% duty on all imports, the more aggressive reciprocal tariffs set to take effect this week were paused for 90 days to allow for negotiations. Though tariffs historically fuel inflation by raising import costs, the delay adds new uncertainty to inflation forecasts for the months ahead.

While March’s CPI figures appear encouraging on the surface, economists caution that the full impact of trade policy changes has yet to be reflected in consumer prices. Analysts expect some upward pressure on inflation later in the year as tariffs work their way through the supply chain.

For now, the Fed appears to be in wait-and-see mode. With inflation easing and activity still soft, central bank officials face a delicate balancing act in the months ahead as they consider the dual risks of economic slowdown and renewed price pressures from trade tensions.

Inflation Remains Stubborn as Consumer Sentiment Hits Lowest Level Since 2022

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– Core inflation rose 2.8% in February, exceeding expectations, while consumer spending increased 0.4%.
– Consumer sentiment dropped to its lowest level since 2022, with growing fears about the labor market.
– The Federal Reserve remains cautious on rate cuts as inflation remains above its 2% target.

The U.S. economy continues to face challenges as inflation remains higher than expected while consumer sentiment has dropped to its lowest level in more than two years. Recent data from the Commerce Department and the University of Michigan highlight ongoing concerns about rising prices, slowing consumer spending, and a weakening labor market.

The Federal Reserve’s preferred inflation measure, the core Personal Consumption Expenditures (PCE) price index, rose 0.4% in February, bringing the annual rate to 2.8%. Both figures exceeded economists’ expectations, marking the biggest monthly gain since early 2024. The broader PCE index, which includes food and energy, rose 0.3% on the month and 2.5% year-over-year, in line with forecasts. Goods prices increased 0.2%, led by recreational goods and vehicles, while services prices climbed 0.4%. Gasoline prices provided some relief, declining 0.8%.

Consumer spending increased 0.4% in February, slightly below the 0.5% forecast, despite a stronger-than-expected rise in personal income of 0.8%. While Americans are earning more, they remain cautious about their spending, with the personal savings rate rising to 4.6%, the highest level since June 2024. The stock market reacted negatively to the inflation data, with futures briefly declining as investors weighed the possibility of prolonged higher interest rates.

At the same time, consumer sentiment has weakened. The University of Michigan’s sentiment index fell to 57 in March, the lowest reading since November 2022. A key measure of consumer expectations for the economy dropped to 52.6, signaling growing uncertainty about financial conditions. Labor market concerns are increasing, with two-thirds of consumers expecting unemployment to rise in the coming year, the highest level since 2009. While February’s job report showed 151,000 jobs added and an unemployment rate of 4.1%, underlying data suggests hiring may be slowing. Indicators such as declining job postings and fewer workers voluntarily leaving jobs point to reduced confidence in the labor market.

The Federal Reserve now faces a difficult decision. After cutting rates by a full percentage point in 2024, the central bank has held off on further moves this year. Policymakers are closely monitoring inflation, particularly as President Trump’s proposed tariffs could increase costs across multiple sectors. While tariffs are generally viewed as one-time price shocks rather than ongoing inflationary forces, the scope of Trump’s trade policies and the potential for a broader trade war add uncertainty to the outlook.

For now, the Fed is likely to maintain its cautious stance, balancing inflation concerns with signs of weakening consumer confidence and labor market risks. If economic conditions deteriorate further, discussions around potential rate cuts may gain traction. However, as inflation remains above the central bank’s 2% target, policymakers are hesitant to move too quickly.

With inflation pressures persisting and consumer sentiment weakening, the economic outlook remains uncertain. Higher prices and job market concerns could weigh on consumer spending in the coming months, potentially slowing economic growth. Investors and businesses will be closely watching for signals from the Fed as it navigates a delicate balancing act between inflation control and economic

Federal Reserve Holds Rates Steady, Adjusts Growth and Inflation Outlook Amid Policy Uncertainty

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– The Fed maintained its benchmark interest rate at 4.25%-4.5% for the second consecutive meeting.
– Core PCE inflation is now expected to be 2.8% at year-end, up from 2.5%.
– GDP growth projections for 2025 were lowered from 2.1% to 1.7%.

The Federal Reserve opted to hold interest rates steady at its March meeting, maintaining the federal funds rate within a range of 4.25% to 4.5%. This decision marks the second consecutive meeting in which borrowing costs remain unchanged, following a series of three rate cuts in late 2024. However, alongside the decision, policymakers signaled a revised economic outlook, reflecting slower growth and more persistent inflation.

Fed officials now forecast that the U.S. economy will grow at an annualized pace of 1.7% in 2025, a downward revision from the previous estimate of 2.1%. At the same time, inflation projections have been raised, with the core Personal Consumption Expenditures (PCE) index now expected to reach 2.8% by year-end, up from 2.5% previously. These adjustments reflect increasing uncertainty surrounding the economic impact of new trade policies and tariffs imposed by the Trump administration.

“Uncertainty around the economic outlook has increased,” the Fed noted in its official statement, referring to the administration’s aggressive tariff measures targeting China, Canada, and Mexico. Additional duties on steel, aluminum, and other imports are expected to be announced next month, potentially disrupting supply chains and fueling inflationary pressures.

While the Fed’s statement maintained language indicating that “economic activity has continued to expand at a solid pace,” policymakers acknowledged growing concerns about the possibility of stagflation—a scenario where growth stagnates, inflation remains high, and unemployment rises. The unemployment rate projection was slightly raised to 4.4% from 4.3%, reflecting potential labor market softening.

In an additional policy shift, the central bank announced a slower pace of balance sheet reduction. Beginning in April, the Fed will reduce the amount of Treasuries rolling off its balance sheet from $25 billion to $5 billion per month, while keeping mortgage-backed security reductions steady at $35 billion per month. The decision was not unanimous, with Fed Governor Chris Waller dissenting due to concerns about slowing the pace of quantitative tightening.

Despite these shifts, the Fed’s “dot plot”—a key indicator of policymakers’ rate projections—still points to two rate cuts in 2025. However, there is growing division among officials, with nine members supporting two cuts, four favoring just one, and another four seeing no cuts at all.

The Fed’s decision and economic projections have triggered mixed reactions in the financial markets. Stocks initially fluctuated as investors assessed the impact of slower economic growth and the persistence of inflation. The S&P 500 and Nasdaq saw volatile trading, while the Dow remained under pressure amid concerns that the Fed may not cut rates as aggressively as previously expected. Bond markets also responded, with yields on the 10-year Treasury note rising slightly as inflation concerns remained elevated.

Investors are increasingly wary of a scenario where economic growth weakens while inflation remains sticky, a condition that could lead to stagflation. Sectors such as financials and consumer discretionary stocks saw selling pressure, while defensive assets, including gold and utilities, gained traction as traders sought safe-haven investments.

Looking ahead, the Fed’s challenge will be navigating the dual risks of inflationary pressures and economic slowdown. The upcoming release of February’s core PCE inflation data next week will provide further insights, with economists anticipating a slight uptick to 2.7% from January’s 2.6%—a figure still far from the Fed’s 2% target.

As the economic landscape continues to evolve, markets will be closely watching the Fed’s next moves and whether the central bank can balance its mandate for maximum employment with maintaining price stability.

What the Fed’s Next Move Means for Interest Rates and the Economy

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– The Federal Reserve is widely expected to hold interest rates steady at its policy meeting next Wednesday.
– The Fed remains cautious as it monitors the potential impact of President Trump’s trade policies and rising inflation risks.
– While a downturn is not imminent, some economists have raised their probability estimates for a 2025 recession.

As financial markets brace for the Federal Reserve’s latest policy decision, analysts overwhelmingly expect the central bank to maintain its benchmark federal funds rate at a range of 4.25% to 4.5%. According to the CME Group’s FedWatch tool, which tracks market expectations, there is a 97% probability that the Fed will hold rates steady, marking the second consecutive meeting without a change.

Federal Reserve officials, including Chair Jerome Powell, have signaled a cautious approach, waiting to see how President Trump’s proposed tariffs and other economic policies unfold. The central bank is balancing multiple factors, including a softening in inflation, shifts in consumer confidence, and geopolitical uncertainty. While the Fed lowered rates late last year after inflation cooled, the recent uptick in price pressures has prompted policymakers to take a more measured stance.

A major concern for the Fed is the potential for tariffs to disrupt economic stability. Trade tensions have already caused a drop in consumer confidence, with the University of Michigan’s Consumer Sentiment Index falling to 57.9 in March, well below expectations. This decline reflects growing worries about inflation and the broader economic outlook. If tariffs push prices higher and dampen growth, the Fed may face pressure to respond with rate cuts to stabilize the job market and economic activity.

On the other hand, some economists warn that persistent inflation could keep interest rates elevated for longer. Rising prices on imported goods due to tariffs could lead to higher inflation expectations, limiting the Fed’s ability to ease policy. This delicate balancing act has led to increased uncertainty about the central bank’s future moves.

Investors will also be closely watching the Fed’s Summary of Economic Projections, which outlines policymakers’ expectations for interest rates, inflation, and economic growth. Deutsche Bank analysts predict that Fed officials may reduce their expected rate cuts for 2025, penciling in only one reduction instead of the two previously forecasted.

Recession fears remain a topic of debate. While the labor market has shown resilience, some economic indicators suggest potential risks ahead. Goldman Sachs recently raised its recession probability estimate for 2025 from 15% to 20%, reflecting concerns over trade policy, consumer sentiment, and broader market conditions. If economic conditions deteriorate further, the Fed could be forced to pivot toward rate cuts to stimulate growth.

Despite these uncertainties, financial markets are currently pricing in the likelihood of a rate cut beginning in June. However, if inflation proves to be more stubborn than expected, the Fed may have to delay any policy adjustments. Powell’s post-meeting press conference will be closely analyzed for any signals about the central bank’s future direction.

With inflation, tariffs, and economic sentiment in flux, the Federal Reserve’s approach remains one of caution. Investors, businesses, and policymakers will all be watching closely for any signs of shifts in monetary policy, knowing that the decisions made now will have lasting effects on financial markets and the broader economy.

Treasury Rally Pushes Yields Below 4% as Inflation Shows Signs of Cooling

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– Short-term Treasury yields fell under 4% as inflation cooled and GDP forecasts weakened, boosting rate-cut expectations.
– Traders anticipate a July rate cut and over 60 basis points of relief by year-end, driving a strong February rally.
– Softer data and policy shifts have investors prioritizing economic slowdown risks over inflation fears.

A powerful rally in U.S. Treasuries has slashed short-term bond yields below 4% for the first time since October, sparked by cooling inflation and shaky economic growth signals. Investors are piling into bets that the Federal Reserve will soon lower interest rates, possibly as early as midyear, giving the bond market a jolt of momentum.

The rally gained steam on Friday as yields on two- and three-year Treasury notes dropped by up to six basis points. This followed a disappointing January personal spending report and a steep revision in the Atlanta Fed’s first-quarter GDP estimate, which nosedived to -1.5% from a prior 2.3%. Even the less volatile 10-year Treasury yield dipped to 4.22%, its lowest since December, signaling broad market confidence in a softer economic outlook.

This month, Treasuries are poised for their biggest gain since July, with a key bond index climbing 1.7% through Thursday. That’s the strongest yearly start since 2020, up 2.2% so far. Analysts attribute the surge to a wave of lackluster economic data over the past week, flipping the script on expectations that the Fed might hold rates steady indefinitely.

Market players are now anticipating a quarter-point rate cut by July, with over 60 basis points of easing baked in by December. The latest personal consumption expenditures data for January, showing inflation easing as expected, has fueled this shift. Investors see it as a green light for the Fed to pivot toward supporting growth rather than just wrestling price pressures.

Still, some warn it’s early days. The GDP snapshot won’t be finalized until late April, leaving room for surprises. For now, two-year yields sit below 4%, and 10-year yields hover under 4.24%. Experts say the rally’s staying power hinges on upcoming heavy-hitters like next week’s jobs report—if it flags a slowdown, the case for rate cuts strengthens.

A week ago, 10-year yields topped 4.5%, with fears of tariff-fueled inflation looming large. But recent tariff threats and talk of federal job cuts have shifted focus to growth risks instead. Investors are shedding bearish positions, and some are even betting yields could sink below 4% if hiring falters and unemployment climbs.

The Fed, meanwhile, is stuck in a tricky spot with inflation still above its 2% goal. If push comes to shove, many believe it’ll lean toward bolstering growth—a move the market’s already pricing in. As February closes, index fund buying could nudge yields lower still, amplifying the rally.

This swift turnaround underscores the bond market’s sensitivity to shifting winds. With jobs data on deck, all eyes are on whether this Treasury boom has legs.

January Inflation Data Complicates Fed Plans as Rising Costs Pressure Consumers

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– The Consumer Price Index (CPI) increased 3% year-over-year in January, exceeding expectations and accelerating from December’s 2.9%.
– Rising energy costs and food prices, particularly eggs, contributed to the largest monthly headline increase since August 2023.
– The Federal Reserve faces challenges in determining interest rate cuts, as inflation remains above its 2% target.

Newly released inflation data for January revealed that consumer prices rose at a faster-than-expected pace, complicating the Federal Reserve’s path forward. The Consumer Price Index (CPI) increased by 3% over the previous year, ticking up from December’s 2.9% annual gain. On a monthly basis, prices climbed 0.5%, marking the largest monthly increase since August 2023 and outpacing economists’ expectations of 0.3%.

Energy costs and persistent food inflation played a significant role in driving the index higher. Egg prices, in particular, surged by a staggering 15.2% in January—the largest monthly jump since June 2015—contributing to a 53% annual increase. Meanwhile, core inflation, which excludes volatile food and energy prices, rose 0.4% month-over-month, reversing December’s easing trend and posting the biggest monthly rise since April 2023.

The stickiness in core inflation remains a concern for policymakers. Shelter and service-related costs, including insurance and medical care, continue to pressure consumers despite some signs of moderation. Shelter inflation increased 4.4% annually, the smallest 12-month gain in three years. Rental price growth also showed signs of cooling, marking its slowest annual increase since early 2022. However, used car prices saw another sharp uptick, rising 2.2% in January after consecutive increases in the prior three months, further fueling inflationary pressures.

Federal Reserve officials have maintained that they will closely monitor inflation data before making any adjustments to interest rates. The central bank’s 2% target remains elusive, and the higher-than-expected January data adds another layer of complexity to future rate decisions. Economists caution that while seasonal factors and one-time influences may have played a role in January’s inflation spike, the persistence of elevated core inflation suggests that rate cuts could be delayed.

Claudia Sahm, chief economist at New Century Advisors and former Federal Reserve economist, described the report as a setback. “This is not a good print,” she said, adding that January’s inflation surprises have been a recurring theme in recent years. She noted that while this does not derail the broader disinflationary trend, it does reinforce the need for patience in assessing future rate adjustments.

The economic outlook is further complicated by recent trade policies. President Donald Trump’s imposition of 25% tariffs on steel and aluminum imports, along with upcoming tariffs on Mexico, Canada, and China, raises concerns about potential cost pressures on goods and supply chains. Market reactions were swift, with traders adjusting expectations for the Fed’s first rate cut and stocks selling off in response.

While the Federal Reserve is unlikely to react to a single month’s data, the latest inflation report suggests that policymakers will need to see consistent progress before considering rate reductions. Analysts now anticipate that any potential rate cuts may be pushed into the second half of the year, dependent on future inflation trends.

U.S. Economy Shows Resilience with 2.3% Growth Despite Year-End Slowdown

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– Consumer spending surged 4.2%, driving overall economic growth
– Full-year GDP growth of 2.8% in 2024 exceeded sustainable growth expectations
– Business investment declined for the first time in two years, signaling potential concerns

The U.S. economy demonstrated remarkable resilience in the final quarter of 2024, growing at a 2.3% annual rate despite expectations of a more significant slowdown. While this represents a deceleration from the third quarter’s 3.1% growth, the underlying data reveals a robust economic foundation driven primarily by extraordinary consumer spending.

American consumers, who represent approximately 70% of economic activity, flexed their financial muscle during the holiday season, with spending surging at a 4.2% rate – the highest increase in nearly two years and double the typical pace. This robust consumer behavior served as the primary engine of economic growth, offsetting challenges in other sectors.

The full-year GDP growth for 2024 registered an impressive 2.8%, surpassing economists’ expectations for sustainable growth rates. This performance caps off a remarkable three-year streak of strong economic expansion, following 2.9% growth in 2023 and 2.5% in 2022, highlighting the economy’s post-pandemic resilience.

However, the report wasn’t without its concerns. Business investment experienced its first decline in two years, pointing to ongoing challenges in the manufacturing sector. The growth in inventories also slowed significantly, subtracting nearly a full percentage point from the headline GDP figure. Additionally, inflation ticked up to 2.3% in the fourth quarter from 1.5% in the third quarter, potentially complicating the Federal Reserve’s interest rate decisions.

As the economy transitions under the Trump administration, businesses are weighing potential opportunities against risks. While proposed tax cuts and deregulation could accelerate growth, concerns about potential tariffs and trade retaliation loom over the business community. The Federal Reserve has adopted a cautious stance, putting interest rate cuts on hold as it assesses both inflation trends and the impact of new economic policies.

Government spending contributed positively to growth, rising at a 2.5% rate and adding 0.4 percentage points to GDP. Despite a surprising surge in December’s trade deficit, international trade had minimal impact on the overall GDP figures.

Market analysts are particularly focused on the sustainability of consumer spending patterns as we move into 2025. The robust holiday shopping season, while impressive, has raised questions about whether households can maintain this pace of expenditure, especially given the uptick in inflation and continued high interest rates. Some economists suggest that the strong spending could be partially attributed to consumers drawing down savings accumulated during the pandemic era, a trend that may not be sustainable in the long term.

The labor market’s continued strength remains a crucial factor in maintaining economic momentum. With unemployment rates staying near historic lows and wage growth remaining solid, the foundation for continued consumer spending appears stable. However, the manufacturing sector’s struggles and reduced business investment could eventually impact job creation in these sectors, presenting a potential headwind to the broader economy’s growth trajectory.

Looking ahead, economists project continued growth at or above 2% for 2025, though the exact trajectory will largely depend on policy decisions from the new administration and the Federal Reserve’s response to evolving economic conditions.

Fed Holds Rates Steady, Signals Caution on Inflation and Economic Policies

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– The Federal Reserve kept its benchmark interest rate unchanged at 4.25%-4.50%.
– Policymakers removed previous language suggesting inflation had “made progress” toward the 2% target.
– Uncertainty looms over the impact of President Trump’s proposed tariffs and economic policies.

The Federal Reserve opted to hold interest rates steady on Wednesday, pausing after three consecutive cuts in 2024, as officials await further data on inflation and economic trends. The unanimous decision keeps the federal funds rate within the 4.25%-4.50% range, with policymakers expressing a cautious stance on future rate moves.

Notably, the Fed adjusted its policy statement, omitting previous language that inflation had “made progress” toward its 2% target. Instead, it acknowledged that inflation remains “somewhat elevated.” This signals that officials see a higher bar for additional rate cuts, even after reducing borrowing costs by a full percentage point last year.

“Economic activity has continued to expand at a solid pace. The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid,” the Federal Open Market Committee (FOMC) stated. Policymakers reiterated that future rate adjustments would be data-dependent, assessing incoming economic indicators and evolving risks.

The Fed’s cautious stance follows months of inflation readings that have hovered above its 2% target. While some indicators, such as the Consumer Price Index (CPI), have shown slight improvement, core inflation remains persistent. The next reading of the Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) index, is due on Friday and could influence future policy decisions.

Adding complexity to the Fed’s outlook, President Donald Trump has signaled intentions to impose tariffs on key trading partners, including Mexico, Canada, and China. Some economists warn that such actions could drive inflation higher, making the Fed’s task of achieving price stability more challenging. Furthermore, Trump has openly pushed for deeper rate cuts, hinting at potential friction with Fed Chair Jerome Powell.

With today’s decision, investors will closely monitor upcoming inflation reports and any shifts in the Fed’s stance. Policymakers have indicated expectations for just two rate cuts in 2025, down from previous forecasts of four. Any sustained inflationary pressures or shifts in fiscal policy could further delay monetary easing.

Fed Chair Powell is set to hold a press conference later today, where he is expected to provide additional insights into the central bank’s outlook and response to evolving economic conditions.

New Inflation Reading Likely Keeps the Fed on Pause for Now

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– December’s core Consumer Price Index (CPI) rose by 0.2% month-over-month, indicating a slight deceleration in inflation.
– Federal Reserve officials are expected to maintain the current interest rates at the January policy meeting.
– Concerns persist about achieving the Fed’s 2% inflation goal amid uncertainties in fiscal and regulatory policies.

Fresh inflation data released Wednesday is likely to keep the Federal Reserve on pause during its next policy meeting this month, even though a new reading did show some signs of easing.

On a “core” basis, which eliminates the more volatile costs of food and gas, the December Consumer Price Index (CPI) climbed 0.2% over the prior month, a deceleration from November’s 0.3% monthly gain. On an annual basis, prices rose 3.2%. It was the first drop on a core basis after three months of being stuck at 3.3%.

“This latest inflation reading confirms a Fed rate cut skip at the January FOMC meeting,” said EY chief economist Gregory Daco. The new print “won’t change expectations for a pause later this month, but it should curb some of the talk about the Fed potentially raising rates,” said Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management. The Fed next meets on Jan. 28-29, and investors are nearly unanimous in their view the central bank will leave rates unchanged after reducing them by a full percentage point in late 2024.

“We are making progress on inflation, it’s just very slow,” former Federal Reserve economist Claudia Sahm told Yahoo Finance Wednesday. “Cuts are not coming later this month, but that doesn’t mean they aren’t coming later this year.”

New York Fed president John Williams said after the CPI release that “while I expect that disinflation will progress, it will take time, and the process may well be choppy.” The economic outlook, he added, “remains highly uncertain, especially around potential fiscal, trade, immigration, and regulatory policies” — a reference to possible changes that could happen as part of the incoming Trump administration. Lots of Fed officials in recent weeks have been urging caution on future rate cuts.

In fact, the Fed’s December meeting minutes showed officials believed inflation could take longer than anticipated to reach their 2% goal, citing stickier-than-expected inflation data since past fall and the risks posed by new policies of Trump 2.0. They noted “the likelihood that elevated inflation could be more persistent had increased,” according to the minutes, even though they still expected the Fed to bring inflation down to its 2% goal “over the next few years.” Several members of the Fed even said at that meeting that the disinflationary process may have stalled temporarily or noted the risk that it could.

The elevated inflation concerns help explain why Fed officials in December reduced their estimate of 2025 rate cuts to two from a previous estimate of four. U.S. Federal Reserve Chair Jerome Powell speaks during a press conference where he announced the Fed had cut interest rates by a quarter point following a two-day meeting of the Federal Open Market Committee on interest rate policy in Washington, U.S., December 18, 2024. REUTERS/Kevin Lamarque.

Inflation could show new signs of progress in year-over-year comparisons later in 2025’s first quarter since in 2024 inflation spiked back up before declining again. Fed governor Michelle Bowman may be the most worried of the Fed officials, saying last week that she could have backed a pause in interest rates last month but supported a cut as the “last step” in the central bank’s “policy recalibration.”

Kansas City Fed president Jeff Schmid, a voting FOMC member this year, said, “I believe we are near the point where the economy needs neither restriction nor support, and that policy should be neutral.” Schmid said he is in favor of adjusting rates “gradually,” noting that the strength of the economy allows the Fed to be patient. Boston Fed president Susan Collins, another voting member this year, also called for a gradual approach.

“With policy already closer to a more neutral stance, I view the current nature of uncertainty as calling for a gradual and patient approach to policymaking,” Collins said. But DWS Group head of fixed income George Catrambone said the new numbers released Wednesday provided a “sigh of relief” for the Fed. But there is still a lot of uncertainty ahead, as new policies from the Trump administration may affect the outlook. As to when the Fed may first cut rates in 2025, “if we don’t see it by Jackson Hole, it’s not coming,” Catrambone added, referring to an annual Fed event that takes place in late August.

Treasury Yields Edge Higher Amid Geopolitical and Economic Uncertainty

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– 10-year Treasury yield rises to 4.41% amid geopolitical and inflation concerns.
– Putin lowers nuclear strike threshold; U.S. embassy closures signal heightened tensions.
– Federal Reserve official warns of stalled inflation progress despite near-full employment.

U.S. Treasury yields rose on Wednesday as investors grappled with the dual challenges of escalating geopolitical tensions and evolving domestic economic conditions. The yield on the 10-year Treasury climbed 3 basis points to 4.41%, while the 2-year yield increased by the same amount to 4.302%. These moves reflect heightened investor caution as uncertainties cloud both global and U.S. economic outlooks.

At the forefront of global concerns is the ongoing Russia-Ukraine conflict. The United States closed its embassy in Kyiv on Wednesday, citing the risk of a significant air attack, signaling heightened tensions in the region. Compounding the situation, Russian President Vladimir Putin announced changes to Russia’s nuclear doctrine, reducing the threshold for a nuclear strike. This alarming shift follows Ukraine’s use of U.S.-made long-range ballistic missiles to target Russian territory, introducing a new layer of unpredictability to the geopolitical landscape. Such developments have rippled through financial markets, prompting investors to weigh their exposure to riskier assets and seek refuge in safer options like Treasuries, despite rising yields.

Domestically, Federal Reserve Governor Michelle Bowman provided a sobering perspective on inflation. Speaking in West Palm Beach, Florida, Bowman stated that progress toward the Fed’s 2% inflation target has stalled, even as the labor market remains robust. She highlighted the delicate balance the Fed must strike between achieving price stability and maintaining full employment, cautioning that labor market conditions could deteriorate in the near term. This acknowledgment has fueled speculation that the Fed may maintain its higher-for-longer interest rate stance, adding further pressure to bond yields.

Economic data due later this week could shed light on these dynamics. October’s flash purchasing managers’ index (PMI) reports from S&P Global are anticipated to provide critical insights into the health of the manufacturing and services sectors. A decline in PMI figures could reinforce concerns about an economic slowdown, while stronger-than-expected data might reignite inflation fears. Investors are also paying close attention to remarks from Federal Reserve officials later in the week, which could offer clues about the central bank’s next moves.

Adding to the uncertainty, the transition to a new Treasury Secretary under President-elect Donald Trump has become a focal point for market participants. Speculation about potential candidates has raised concerns about their experience and ability to navigate complex fiscal challenges. With geopolitical risks, inflation pressures, and evolving monetary policy already in play, the choice of Treasury Secretary will likely influence investor confidence and fiscal strategy in the months ahead.

As these factors converge, the bond market remains a key barometer of investor sentiment. Rising yields reflect a balancing act between risk and return as markets digest the interplay of global turmoil, domestic policy signals, and economic data. Investors will continue to watch these developments closely, with each data release or policy announcement potentially reshaping market dynamics.

Fed Chair Powell: No Rush to Cut Rates Amid Strong U.S. Economy

Posted on by slightbourne@noblecapitalmarkets.com
Key Points:
– The Federal Reserve is in no hurry to reduce interest rates due to strong economic indicators.
– Chairman Powell emphasizes that inflation remains slightly above the 2% target.
– The Fed will approach future rate cuts cautiously, allowing flexibility based on economic signals.

Federal Reserve Chair Jerome Powell recently signaled that the central bank sees no need to accelerate interest rate cuts, pointing to the resilience of the U.S. economy. Speaking at a Dallas Fed event, Powell highlighted the strength in several key economic indicators—including sustained growth and low unemployment—while acknowledging that inflation remains slightly above the Federal Reserve’s target.

Currently, inflation sits just above the Fed’s preferred 2% target, with October’s Personal Consumption Expenditures (PCE) price index estimated at around 2.3%, while core PCE inflation, which excludes volatile food and energy prices, is anticipated to reach about 2.8%. Although inflation remains higher than the target, Powell emphasized the Fed’s confidence that the economy is on a “sustainable path to 2%” inflation, justifying a gradual, measured approach to any future rate adjustments.

Despite continued economic growth, which Powell described as “stout” at an annualized rate of 2.5%, and a stable job market with a 4.1% unemployment rate, the Fed is maintaining its flexibility. According to Powell, the ongoing strength of the economy allows the Fed to “approach our decisions carefully.” This measured stance contrasts with earlier expectations from financial markets, where investors had anticipated a series of rate cuts for the next year. Now, based on Powell’s remarks, these expectations are being recalibrated, and fewer cuts are anticipated.

The Fed’s cautious stance also reflects broader economic uncertainties as the U.S. awaits potential policy changes from President-elect Donald Trump’s incoming administration, particularly regarding tax cuts, tariffs, and immigration policy. These factors could impact inflation and growth in ways that are still unfolding. Investors are closely watching the economic outlook as they prepare for potential policy shifts that could influence both the domestic economy and inflationary pressures.

Powell’s comments come at a critical time as the Fed’s next policy meeting approaches on December 17-18, with many traders expecting a further quarter-point reduction. However, recent inflation and economic strength may lead the Fed to hold off on more aggressive cuts in the near future. Powell reiterated that the Fed is committed to reaching its inflation goals, stating, “Inflation is running much closer to our 2% longer-run goal, but it is not there yet,” underscoring the Fed’s careful monitoring of inflationary trends, including housing costs.

As markets adjust to the Fed’s deliberate approach, Powell’s emphasis on data-driven, cautious decision-making has given investors insight into the central bank’s priorities. With the economy sending no urgent signals for rate cuts, the Federal Reserve appears poised to balance economic stability with its commitment to achieving sustainable inflation, underscoring its willingness to act when necessary but not before.