This Week's State Of The Economy - What Is Ahead? - 10 January 2025

By: Taro Chellaram /Wells Fargo Economics & Financial Report/Jan 13, 2025

This Week's State Of The Economy - What Is Ahead? - 10 January 2025

Meetings of the Federal Reserve's Open Markets Committee are about what the Fed is doing; minutes of those meetings tell you something about what policymakers are thinking. Minutes from the December meeting, released on Wednesday, showed policymakers were generally comfortable holding rates steady in the near term after having cut the key lending rate by a full percentage point since September. The minutes offered an interesting conditional statement (our emphasis added) “many participants noted that the Committee could hold the policy rate at a restrictive level, or ease policy more slowly, if inflation remained elevated, and several remarked that policy easing could take place more rapidly if labor market conditions deteriorated.”

Plugging this week's economic data into those conditional statements is a fairly straightforward exercise. First, did inflation remain elevated? In the absence of hard data, the most relevant inflation data this week was survey-based. The ISM prices paid component for the service sector jumped 6.2 points in December to signal the broadest increase in service sector costs since February 2023 (chart), and consumer long-term inflation expectations (5-10 years ahead) broke out of its narrow range rising to the highest level since 2008 in early January. How about labor market conditions; did they deteriorate? On the contrary, the labor market added over a quarter million jobs, the most since March, and the jobless rate fell to 4.1%.

Taking the pulse of policymakers in the context of mixed economic data can sometimes be a delicate exercise, but this is not one of those times. Taking the minutes at their word in the context of this week's data suggests a more compelling case for a pause in interest rate cuts compared to a week ago. Ultimately current economic conditions are not supportive of easing. The Fed is tasked with promoting maximum employment and stable prices. The labor market remains steady. Signs of labor market moderation did not completely go away with the December jobs report, but recent hiring data take some of the sourness out of the summer readings that pointed to a more direct deceleration. It's also hard to imagine businesses are gearing up to let go of a large swath of workers today amid elevated profit margins and resilient service-sector activity. Inflation is also still above target. We'll get fresh inflation data with next week's CPI, but recent hard data suggest progress to the Fed's 2% target has stalled. Through November, the CPI was up at a 2.7% annual rate. The Fed's preferred inflation metric, the PCE deflator, also remains stubbornly above target at 2.4%. While services prices remain the primary driver of inflation today, looming tariff concerns further cloud the trajectory of inflation, encouraging a more cautious approach from Fed officials.




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