The Line: The Fed Says, “You’ll get nothing and like it.”

  
3 Min Read

By Gregory Heym, BHS Chief Economist and and host of Crossing The Line

There were three big releases in the world of economics this week, which we will cover in chronological order starting on Wednesday with a Caddyshack reference.

The Line: The Fed Says, “You’ll get nothing and like it.”

Just like Judge Smails told his grandson Spaulding when he wanted some food, the Fed told us on Wednesday we weren’t getting any rate cuts this month. Maybe Spaulding was surprised he got nothing, but the Fed’s decision shouldn’t have been a surprise to anybody. The much-better-than-expected December jobs report, combined with the fact that inflation remains well above the Fed’s 2% target left them with no choice but to pause.

So, when will we get more rate cuts? Probably in late spring or early summer. Their next meeting is in March, but the odds of a cut then are currently at just 18%. As I’ve said all along, the Fed needs to see more progress on the inflation front, which will require slower economic growth. Speaking of economic growth, that brings us to Thursday’s GDP report.

Economic Growth Less Than Expected In the Fourth Quarter

Wow. We were just saying we needed slower economic growth, and the GDP report delivered. At 2.3%, the annual rate of economic growth in 4Q24 came in below the 2.5% Dow Jones forecast. The fourth quarter figure comes after growth rates of 3.1% in the third quarter, and 3.0% in the second quarter.

While the headline GDP number was a bit disappointing, if we dig into the data we get a much rosier picture of the economy. Personal consumption expenditures—a.k.a what you and I buy—rose at a 4.2% annual pace in the fourth quarter, their biggest increase since the first quarter of 2023. Gross private domestic investment was the only negative contributor to 4Q24 GDP, falling for the first time since 1Q23. The 5.6% decline in investment subtracted 1.03% from the 4Q24 GDP number.

So, while the headline number makes it look like the economy is slowing down, a deeper dive into the numbers tells us that consumers are still spending at a solid pace. The decline in investment will probably be short-lived as companies will need to ramp up production to keep up with demand.

Now on to Friday’s big news on inflation.

Core PCE Inflation Up 2.8% Over the Past Year

For those of you who are new to The Line, PCE stands for personal consumption expenditures, and core means food and energy prices are excluded. The core PCE index is the Fed’s preferred measure of inflation, as it includes the most complete data on prices.

Now that we got that out of the way, the core PCE index rose 0.2% in December and is 2.8% higher than a year ago. Since the Fed is shooting for a 2% annual rate of inflation, this tells us they still have a long way to go before declaring victory. The best thing I can say about this data is that it was in line with expectations, so the stock market shouldn’t have any meltdowns over it.

So, what’s the takeaway from these three items?

  1. The economy is still growing at a solid pace, with hiring and consumer spending still at high levels.

  2. Inflation remains far above the Fed’s 2% target.

  3. Don’t expect Fed rate cuts anytime soon.

For the latest on the economy and real estate market, subscribe to Crossing the Line today! 

Similar Articles