Fed holds rates steady; new tariffs add uncertainty

FOMC interest rate decision

Last week, the Federal Open Market Committee (FOMC) unanimously voted to keep rates steady. The Committee indicated that the two main economic drivers of the interest rate-cutting cycle, unemployment and inflation, stabilized but remain persistent. While unemployment remains consistent, inflation continues to exceed the Fed’s 2% target objective. In previous press releases, the Federal Reserve used language implying that inflation was making progress towards the 2% goal. However, that line was omitted from the most recent January press release. Although Chair Powell said this should not be interpreted as a signal, he also noted that while the Committee felt confident in the stability of the labor market, inflationary uncertainties would have to be monitored continuously for future rate-cut decisions. As of last Friday, following the FOMC meeting, markets were projecting roughly two 25-basis-point rate cuts by the end of 2026, reinforcing the “higher for longer” narrative that had been a key theme in recent years.

PCE, GDP, and growth

December’s PCE numbers were released at 2.6% year-over-year (YoY) for headline and 2.8% YoY for core. While core remained unchanged at 2.8% YoY from last month’s YoY release, headline had increased from last month’s 2.4% YoY rate. Inflation has proven stubborn, as consumption remains strong. Last Thursday’s advance estimates for Q4 GDP echoed that trend, as growth increased by 2.3% quarter-over-quarter, primarily driven by consumer spending and government spending. Although the figure was a slowdown from the 3.1% rate from the last release, consumer spending rose 4.2% in the last quarter, representing the fastest growth rate since the first quarter of 2023. Separately, West Texas Intermediate (WTI) crude increased by 0.2% to $73.56 per barrel, reflecting uncertainty around the impact of tariffs and the upcoming OPEC+ meeting on the global oil market. Overall, the figures imply that while consumer strength remains strong, inflation and persistent price growth must be closely monitored to ensure the continued health of the U.S. economy.

Tariffs

This past weekend, President Trump announced that he would be imposing a 25% tariff on imports from Canada and Mexico and an additional 10% tariff on imports from China, arguing that a “threat posed by illegal aliens and drugs...constitutes a national emergency.” The announcement caused the 10-year Treasury to dip downwards and global stocks to tumble. However, around 10:30 a.m. Monday morning, Trump announced he would delay the tariffs on Mexico for a month in exchange for more border protections against drug trafficking. As these tariffs begin to impact the economy, markets are projecting higher prices for U.S. consumers, since U.S. businesses will bear the cost of the tariffs on foreign imports and, ultimately, pass those increased costs along to buyers.

The week ahead

Key economic reports this week will include the unemployment rate, nonfarm payrolls, job openings, and ADP employment data.