Key inflation rate of the Fed remains high; GDP growth rate plummets
The Federal Reserve's benchmark inflation rate came in higher than expected, while the slowdown in Q4 GDP growth also exceeded expectations. Following the data release, S&P 500 index futures extended their losses, with the market focused on both the potential conflict with Iran and the Supreme Court's possible ruling on Trump's tariff policies.
The job market may be stabilizing, but persistently high inflation has reduced the likelihood of the Fed cutting interest rates again before at least June.
Fed Rate Cut Odds Decline
According to CME Group's FedWatch tool, after the release of GDP and PCE inflation data, the market still expects a 6% probability of a Fed rate cut before the March 18 meeting and a 20% probability before the April 29 meeting. The probability of a rate cut before the June 17 meeting fell from 58% to 56%.
Real goods spending this quarter was essentially flat, down just 0.1%. Services spending grew 3.4%, with healthcare spending making a significant contribution. Despite a decline in residential investment, private domestic investment still grew 3.8%, marking the best quarterly performance since Q2 2024.
Futures Losses Slightly Widen
Affected by GDP and PCE data, S&P 500 index futures fell 0.3%, slightly worse than levels before 8:30 AM ET. The yield on the 10-year U.S. Treasury note fell slightly by 1 basis point to 4.06%.
Impact of Government Shutdown
Direct government purchases and investment fell 5.1% this quarter, with federal direct purchases and investment down 16.6%. This reduced the GDP growth rate by 0.9 percentage points.
Before the GDP report was released, President Donald Trump posted on Truth Social that the government shutdown "cost at least two full points of GDP."
GDP Slows
Q4 GDP grew 1.4%, down from 4.4% in Q3. The government shutdown had some impact. However, the reality is worse than it appears on the surface. The domestic final sales to private consumers, closely watched by the Fed, grew 2.4%.
Fed Inflation Gauge Overshoots
The core PCE price index rose 0.4% month-on-month and 3% year-on-year. The November reading may have been underestimated due to the government shutdown.
GDP Forecast
Wall Street economists forecast Q4 GDP growth of 2.8%, down from 4.4% in Q3. Personal consumption expenditures are expected to grow 2.4%, down from 3.5% in the previous quarter.
Data released on Thursday showed the trade deficit unexpectedly surged to $70.3 billion in December, dampening expectations for Q4 GDP growth as more growth came from overseas production. To exclude the volatility of trade data, the Fed focuses on final sales to domestic private consumers.
Fed Inflation Gauge
The Fed pays more attention to the core PCE price index than the core CPI. Core PCE inflation data will be released alongside the December personal income and spending report.
Economists expect the core PCE price index to rise 0.3% month-on-month and 2.9% year-on-year in December. The headline PCE price index, which includes food and energy prices, is expected to rise 0.3% month-on-month and 2.8% year-on-year in December.
Fed Rate Cut Odds
Before the release of GDP and PCE inflation data, according to CME Group's FedWatch tool, the market saw only a 6% chance of a Fed rate cut at the March 18 meeting. The probability of a cut at the April 29 meeting was 20%, rising to 58% by the end of the June 17 meeting.
S&P 500 Index
Before the economic data release, S&P 500 index futures fell 0.1%. On Thursday, the S&P 500 fell 0.3%, ending a three-day winning streak and remaining below its 50-day moving average.$S&P 500(.SPX.US)
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