Fed Watch – 2/28/2025

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Hello, thank you for joining us for this edition of Fed Watch. I’m Brian Beaulieu from ITR Economics, and today is February 28, 2025.

Most of the data that’s come out last week and this week has been looking weak, and the market has reacted accordingly. Many of the bond markets, I’m talking about, not the stock market. But before we get into that, I wanted to let you know about an interesting Federal Reserve study. They went in and they quantified to the best of their abilities the impact decreasing trade has. That would include imposition of tariffs on GDP, tried to quantify the drag that it has on GDP, and they looked at the inflation ramifications of tariffs. And those, by the way, wane after four to six quarters, they really wane because people figure their way around those tariffs. It’s usually the way it works out, or they get imposed once and they don’t need to be re-instituted in terms of additional price hikes.

The GDP portion continues to show or showed that our assessment is right. This isn’t going to turn us into a downturn, this being the continual rollout of tariffs. Apparently on March 2nd, we’re going to be rolling out some 25% tariffs on Canada and Mexico, pity Canada and Mexico, but we will be fine. There will be a cost increase for that, particularly on the food side. We’ve set up a whole dashboard so we can look at producer price index and consumer price indexes on a wide variety of fruits, vegetables, meat, grains, etc. So we can see what’s going on there because we rely very heavily on… Canada and Mexico for those. And that’s going to have an inflationary impact. We’ll monitor what the increase actually is.

Getting back into what’s going on right now. This week, the money supply data came out and it showed that the 1/12 was still positive. It’s at 0.9%. But it’s stuck there at 0.9%. That’s a slow rate of growth for the money supply. We’re back on trend with the pre COVID movement, but it should be accelerating a little bit more after three months and it’s still holding flat. That suggests to us along with this other data that we’re going to talk about that clearly, we’re not out of the woods yet. We have been saying that the first half of 2025 would be weaker than the second half and that there is going to be some more sluggishness in the first half. And that’s what we’re seeing in all of this data.

The new home sales data. January was not a good month. It was weaker than normal December to January change. Seasonally, we’re doing okay because that looks at the three months moving total, so it helps us avoid a lot of the jumpiness that goes from one month to the next. 3/12 is at 6.0% despite that softness, but it’s the softness from December to January in the year-over-year that’s going to get people nervous about those numbers.

Single family permits also came in 3.4% below this time last year. We are definitely seeing some slowing in the 12 month moving total, but when I tore those numbers apart for us, again, the seasonality was good. The December to January percent change was actually better than normal. The rate of change we get into negative territory mainly because last year was off the chart. It’s crazy good. It’s what we call a reciprocal pressure. So, the 12 month moving total is still in recession. There’s no denying that, but it’s down a mile with a normal 1.0%. It’s going to stay a mile, and we think we’re still on track for seeing that reverse direction in the second half of 2025.

The initial jobless claims got all sorts of headlines because that was up. Looking at it, seasonally adjusted, which is how some people prefer to do it. The weekly number is running above the moving average, so that’s giving them some heartburn. The same release, though, a little bit further down, shows that the not seasonally adjusted number was trending down slightly, although it is slightly higher than it was a year ago. So, it’s the seasonal factor that’s really giving people the heartburn as opposed to looking at the data. To be clear, the latest initial claims do not include the federal employees that are being let go. That data has not hit yet. In fact, if you look at the federal employees, that was up only one from one year ago.

Core inflation declined as measured by the personal consumption expenditure as price index, it declined to 2.6%. That’s really within the shooting range, the Federal Reserve’s target. All this weakness could mean that they wanted to, or they’d be leaning toward and all else being equal, I think lowering interest rates one more time. But it’s the tariffs and their analysis that that’s gonna add some tens of a percentage point to the rates of inflation that has some digging their heels in at this particular time. The overall personal consumption expenditures price index, not the core, but the overall was at 2.5%, but it’s still higher than it was in August, September, or October when it was 2.1 to 2.3%. So they’re not getting a great deal of relief in terms of inflation.

I think what has, me most concerned out of the data that came out it came out this morning was that real personal income excluding government transfer payments was up 1.5 percent euro per year that’s adjusted for inflation so being up is good but at 1.5 percent it’s weak pre-covid the 10-year average was up to would be like a 2.8 percent euro per year increase and a 20-year average would have been 2.2 percent so we’re running way below average in this income and that to us signals we’re going to see some sluggishness in the economy over the next one to two quarters.

The bond market certainly is picking up on all this weakness the 10-year government bond yield dropped to 4.266 percent that’s down about 40 basis points from two weeks ago that’s a big move and it’s not because they don’t see less inflation i think it’s because they see a weakening economy and there’s a great deal of concern about just how rapid all the trade numbers are going to be impacted and the domestic supply chains are going to be impacted it creates a lot of uncertainty.

Freddie Mac 30 year fixed rate mortgage is running around 6.56 percent to 6.76 percent so call that about a 20 basis point decline from last week so we’re seeing long-term interest rates come down we’re not seeing short-term interest rates come down so the yield curve continues to look fine but people aren’t liking what they’re seeing about the economy the decline in these long-term interest rates by the way this is part of what we were saying about if you get some interest rate decline take the time to lock and load.

We’re knee-deep into getting ready for our March 20th virtual webinar we had a great meeting on that topic yesterday with our partners at Crowe there’s going to be some very good intel on supply chains tax changes coming out of the administration or proposed tax changes implications. A lot of things for us to be thinking about and I’ll be talking about what the 2030s will look like on a global basis, not just in the United States.

So lots going on, take these interest rates and run if you have a need for them and don’t get overly excited or don’t get a whole lot of heartburn over the week seeing these numbers. It’s not really that surprising and they’re not as weak as they initially look, at least on the headlines.

We’ll see you again on March 7th. Till then, hope you have a great week.