Fed’s Inflation Gauge Hits 2.6%, Will Rate Cuts Come Sooner?

Dear Reader,

The latest inflation data is in, and it’s sending mixed signals, the Federal Reserve’s preferred inflation measure, the Personal Consumption Expenditures (PCE) price index, rose 2.6% annually in January, which is a step down from the 2.9% in December. While this shows inflation is cooling, the report also revealed worrying signs for economic growth.

Inflation Slows, but Spending Drops

While inflation is moving in the right direction, consumer spending is declining faster than expected, raising concerns about a broader slowdown:

• Personal spending fell 0.2%, instead of the expected 0.1% increase.

• Personal income, however, jumped 0.9%, showing that people are choosing to save rather than spend.

• The savings rate rose to 4.6%, reflecting an increased caution by consumers.

Is a Recession on the Horizon?

The Atlanta Fed’s GDP tracker now predicts a 1.5% contraction for Q1 2025, a dramatic reversal from the earlier estimate of 3.9% growth. Several indicators suggest that the economy could be heading for a rough patch:

• Rising unemployment claims hit their highest level since October.

• The bond market is flashing warning signs, with the 3 month Treasury yield moving above the 10 year note, a historically reliable recession indicator.

• Stock market volatility continues, with the Dow up just 2% for the year despite wild swings.

What This Means for Interest Rates

With inflation cooling and economic growth stalling, investors are now betting on multiple rate cuts this year. Fed Chair Jerome Powell has signaled patience, saying the central bank wants to see inflation stabilize before making any moves. However, the market disagrees:

• Traders are now pricing in a 70% chance of a rate cut by June.

• Expectations for three rate cuts in 2025 are rising, with some betting on even more.

Trump’s Tariffs Could Complicate the Picture

Adding to the mix, the new tariffs are expected to raise prices on imports, which could slow inflation progress and force the Fed to rethink its timeline for rate cuts.

What’s Next?

• March 20: The Fed’s next rate decision—will they hint at an earlier cut?

• April 1: Trump’s review of China’s trade deal compliance could spark more tariff escalation.

• Upcoming Jobs & Inflation Reports: Key data in March will determine the Fed’s next move.

The Fed is walking a tightrope, either cut rates too soon, and inflation could rebound, or wait too long, and the economy could weaken further.

What do you think ?

Stay tuned,

Grand Crypto Insider