The Federal Reserve is definitely pumping the brakes on rate cuts, and they’re blaming uncertainty surrounding President Donald Trump.
Minutes from the Fed’s December meeting dropped today, showing us a room full of officials who are uneasy about inflation and scratching their heads over what Trump’s policies on trade and immigration might mean for the economy.
His name wasn’t directly mentioned—because, of course—but his incoming administration’s moves are all over the discussion. The Fed has been walking a tightrope since inflation started throwing tantrums. While recent data shows some signs of cooling, it’s not enough to make anyone at the Fed relax.
Inflation slows, but not enough
Total consumer price inflation, measured by the 12-month personal consumption expenditures (PCE) price index, was sitting at 2.3% in October, a drop from 3.0% in the same period last year.
Core PCE inflation—stripping out the usual suspects like food and energy—was at 2.8%, down from 3.4% a year earlier. By November, estimates pointed to total PCE inflation at 2.5% and core inflation holding steady at 2.8%.
Consumer price index (CPI) data told a similar story. In November, CPI inflation came in at 2.7%, with core CPI at 3.3%. Both figures are lower than they were in 2023, but they’re not low enough for anyone to throw a party. The Fed remains laser-focused on core inflation, which hasn’t cooled as much as expected, thanks to sticky categories like services.
Labor market conditions are also changing, though only slightly. Average monthly payroll gains were slower in October and November compared to the third quarter, partly because of strikes and natural disasters.
The unemployment rate inched up to 4.2% in November, with participation rates dipping as well. Still, wages didn’t flinch, holding steady with a 4% year-over-year increase in November.
Economic growth holds steady, foreign markets stumble
The US economy isn’t doing too badly—at least for now. GDP growth in the third quarter was solid, matching the pace of the second quarter. Consumer spending and private investments pushed the numbers up, but imports outpaced exports, creating a drag.
In the fourth quarter, indicators showed that GDP growth stayed strong, with consumer and private spending leading the charge again. Meanwhile, imports dropped off in October, particularly capital goods.
Overseas, it’s a bit complicated. The eurozone and Mexico saw growth in the third quarter, but by year’s end, momentum was running out of steam. Manufacturing slowed, and private consumption remained weak.
China, meanwhile, struggled with low retail sales growth, weak domestic demand despite high-tech production in other parts of Asia staying hot, thanks to US demand.
Inflation in advanced economies eased, thanks to earlier drops in energy prices, but services inflation refused to budge in some areas. Latin America, especially Brazil, faced a different beast, with rising inflation fueled by currency issues.
Markets adjust to Fed signals
Now let’s talk markets. Investors have been adjusting their expectations for rate cuts ever since the Fed started showing its cautious side. Treasury yields initially rose post-election but flattened out by the end of the period covered in the minutes. Near-term inflation expectations nudged higher, while long-term measures barely moved.
Equity markets, on the other hand, were riding a wave of optimism. Stocks in cyclical sectors shot up, with investors betting on strong corporate profits. High-yield bond spreads narrowed, and the VIX—a gauge of stock market volatility—dropped to levels much lower than before the election.
Bitcoin, though, remains below $100,000 after falling down yesterday. Internationally, things weren’t so rosy. Weak data from abroad and expectations of rate cuts from foreign central banks pulled bond yields down in advanced economies, boosting the dollar some more.
Foreign equities underperformed US stocks, reflecting expectations of diverging economic growth between the US and the rest of the world.
Central banks abroad were busy too. Canada, Europe, Hong Kong, and Mexico all cut rates during the period. Brazil, on the other hand, went rogue, hiking its rate by 100 basis points to fight inflation.
Borrowing costs remain high, households feel the squeeze
Despite some stability in short-term funding markets, borrowing costs in the US remained high across the board. Mortgage rates ticked down slightly but stayed historically elevated. Auto loans and credit card rates remained near record highs, although auto loan rates did see minor decreases.
Corporate borrowers saw a bit of relief, with yields on investment-grade and speculative bonds dipping. Commercial real estate loans, after stalling in the third quarter, picked up slightly in October, but delinquencies in this sector continued to climb. Small businesses had it rough, facing tight credit conditions and weak loan originations.
Households didn’t have it much better. While credit was generally available for those with strong credit scores, delinquencies on credit cards continued to rise. Federal Housing Administration mortgage delinquencies stayed above pre-pandemic levels, adding to the pressure on lower-income borrowers.
The Fed will continue reducing its holdings of Treasury securities and mortgage-backed assets. However, officials are keeping a close eye on data and will make adjustments as necessary. They said, “The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.”
