Fed's Key Inflation Rate Hot; GDP Growth Tumbles (Live Coverage)

• Core PCE inflation rose 0.4% monthly and 3% annually, above forecasts of 0.3% and 2.9%, signaling persistent price pressures
• Q4 GDP growth tumbled to 1.4% from Q3's 4.4%, missing the 2.8% forecast, partly due to a 5.1% drop in government spending from the shutdown
• Market odds of a Fed rate cut by the April 29 meeting stand at just 20%, with June odds at 56%, as inflation remains elevated above the Fed's 2% target

Market Summary: Fed Inflation Hot, GDP Growth Slumps

Key Economic Data:

Fourth-quarter GDP growth slowed sharply to 1.4%, down from 3.5% in Q3 and missing the 2.8% forecast. However, private sales to final domestic purchasers—a key Fed metric—rose 2.4%, indicating underlying economic strength.

The core PCE price index, the Federal Reserve's preferred inflation gauge, rose 0.4% monthly and 3% year-over-year in December, exceeding the 2.9% forecast and running well above the Fed's 2% target.

Government Impact:

The government shutdown significantly impacted growth, with direct government purchases falling 5.1% and federal spending down 16.6%, subtracting 0.9 percentage points from GDP. President Trump claimed the shutdown reduced GDP by "at least two points."

Spending Breakdown:

Goods spending remained essentially flat (down 0.1%), while services spending increased 3.4%, with health care outlays providing strong contributions. Gross private domestic investment rose 3.8%, the strongest quarter since Q2 2024. The December trade deficit unexpectedly widened to $70.3 billion, moderating growth expectations.

Market Implications:

Following the data release, S&P 500 futures extended losses to 0.3%, while the 10-year Treasury yield ticked down one basis point to 4.06%. Fed rate-cut probabilities diminished, with only 20% odds of a cut by April 29 and 56% by June 17 (down from 58%). The combination of persistent inflation and economic resilience has effectively pushed out expectations for monetary easing until mid-year at the earliest.

Markets remain focused on potential geopolitical risks involving Iran and a possible Supreme Court ruling on Trump tariffs.