Fed Watch – 1/3/2025

with brian beaulieu

WEEKLY FED WATCH

This week on Fed Watch, ITR Economics Consulting Principal and Chief Economist Brian Beaulieu provides an economic update based on the latest from several of our leading indicators. Signs point to potential economic improvement in the second half of 2025 into 2026, but do we expect to see significant interest rate decline this year? Tune in to find out!

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Key Episode Takeaways

  • 0:18 – Current economic conditions and indicator data
  • 0:41 – Housing market weakness and ITR Retail Sales leading indicator data
  • 1:38 – Interest rates and bond market analysis
  • 2:14 – Yield curve and future outlook
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“The economy is still stuck in this economic doldrum period. We have some leading indicators that have improved a little bit and some that have weakened.” – Brian Beaulieu Share on X
“For those of you hoping for significant or meaningful interest rate decline, we just don't see it on the horizon, not in 2025. And we see the opposite of decline happening post-2025.” – Brian Beaulieu Share on X
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The below transcript is a literal translation of the podcast audio that has been machine generated by Notta.

Hello. I’m Brian Beaulieu. Thank you for joining us January 3rd, 2025, and this is Fed Watch. A lot of data came out over the last two weeks. We’re not going to go through every bit of it. Suffice it to say that the analysis really hasn’t changed.

The economy is still stuck in this economic doldrum period. We have some leading indicators that have improved a little bit and some that have weakened. There’s some total of housing data that came out. It was really mixed. Permitting for single-family homes was just downright weak.

The ITR financial leading indicator fell to its lowest level in 18 months. Yet the ITR retail sales leading indicator showed some signs of life. A lot of different aspects of things going on, which tells us we’re still in this mixed current where the economy is going to be doing much of nothing in terms of change over the next one to two quarters if it’s been a tough slugging period for you.

That’s likely going to be if you’re running in low single digits compared to your levels. You’re probably maintained at that point, all of which means the Federal Reserve isn’t going to have any real impetus to change their mind about lowering interest rates, but the bond market isn’t either.

Look this morning and again today is January 3rd. The 30-year fixed rate mortgage was at 6.95%. That’s down just four bips from two weeks ago when we spoke. I mean that’s nothing and we’re not seeing much change in the momentum there at all. As we said in the executive summary for December’s ITR trends report, I think people who are hoping for a drop in the mortgage rates are going to be disappointed if they think they’re going to get a meaningful drop.

The 10-year bond yield is essentially unchanged at 4.50% or it’s fluctuating plus or minus four basis points this morning. It was 4.52% last time we spoke. So again, no change. All of which means on the good side, if you look at some good news, the inverse yield curve on all metrics has finally reverted back to normal with these long-term interest rates staying high and the Fed lowering the Fed funds rate and the discount rate.

We’re seeing even the 20-year to two-year bond yield revert back to a normal status. That’s good in terms of our outlook for an improving economic environment in 2025, second half of the year and some more in 2026, but be careful. It’s not going to be a rapid takeoff. There’s no big rebound going on here from really weak performance.

So this is going to be a slow moving improvement, but it will be an improvement. And for those of you hoping for significant or meaningful interest rate decline, we just don’t see it on the horizon, not in 2025. And we see the opposite of decline happening post 2025.

That’s today’s update. We will be back on January 10th next week. Thank you for joining us this week for Fed Watch.