Fed Watch – 1/31/2025

The below transcript is a literal translation of the podcast audio that has been machine generated by Notta.

Hello, I’m Brian Beaulieu, Chief Economist for ITR Economics. Thank you for joining us on this January 31st edition of Fed Watch.

The Fed met earlier this week and they decided not to lower rates. I don’t know that anybody outside of Washington anyways was particularly surprised. The numbers aren’t there to suggest that they needed to lower rates. In fact, they’re probably concerned about the latest inflation indications. We’ll get into that in just a moment, but no surprise that they didn’t lower rates. I know that those short-term rates matter to some people. I think it’s still possible to get another 25 bips out of the Fed. The bond market seems to be easing up a little bit in that direction also.

The bottom line is that things are getting better as we go through 2025 in the economy. The Fed may feel that they have some maneuvering room in the near term that they’re not going to have in the second half of the year, but the leading indicators are really good.

The most recent housing permits data for a single family, December data came in 2.6% ahead of last year. It’s not normal to see December come in above normal, but we saw that also. The 12/12 rate of change is in phase A, so we’re shifting in the permitting trend for single-family homes from overt decline into rise. We’re seeing that same reversal going on in multifamily housing too. that 1/12 picked up to 2.0%. So we actually had some data trend rise going on. And we had a better than average November to December change in those permits.

So that’s all encouraging. It’s not like we’re getting a real big change in mortgage rates or anything, but people are moving. The permitting process is moving. New homes sold and the fourth quarter came in 1.4% above a year ago level. Data trend is back to rising. It’s the highest level now that we’ve seen in a little over two years, 27 months to be exact. So homes are moving.

GDP, fourth quarter preliminary data came out and that looked pretty good. We’re still seeing slowing in the rate of growth. And the actual data point and the preliminary data came in 0.5% above our forecast average. It’s on target without general expectations. We expect this deceleration is slowing to continue in the first half of 2025, but not enough to give anybody, and particularly at the Federal Reserve, any sort of heartburn. What was driving the GDP number is encouraging for businesses in that the consumer was really driving it much more services than goods, though, is what was being consumed.

Business investments and hard assets was weak. Imports were up. Exports were down. Those aren’t great indications for the overall health. That’s what I mean. They’re going to have some more maneuvering room if they want it in the first half of this year, but then things are going to get more and more solid. The tariff firm is going beneath us.

Core inflation, for the quarter, we don’t have the PCE monthly data yet, but core inflation as measured by the PCE, personal consumption expenditures data, actually got a little harder in the fourth quarter. The fourth quarter showed 2.5% rate of inflation versus 2.2% in the third quarter. That enough is enough to make them say, okay, that’s going the wrong way. Overall, producer personal consumption expenditure price data, I’m sorry, in the fourth quarter was up 2.3% versus in the third quarter, it was up only 1.5%. That’s a very noticeable increase in some inflationary pressures that we know the bond market had already foreseen and the Federal Reserve looks at more closely.

Mortgage rates, 30 year fixed rate mortgage are hanging in there above 7%. We’re continuing to normalize that I think in our thinking process. I hear a few and fewer people expecting rates to go down. Keep an eye on food prices, by the way, we’re thinking about that inflation a little bit more. We’re going to see some, potentially we’re going to be seeing some food price inflation, which really impacts people’s discretionary income, just like the insurances go up or automobile repairs go up.

The 10-year bond yield eased down about 10 basis points over the last week, 11 basis points to be exact. At least that’s not getting worse right now, but we don’t expect considerable relief there. The market doesn’t seem to be in the mood for it.

I was talking to somebody earlier today as a matter of fact, And you know our long-term, if you saw our December webinar or if you’ve had ITR to come speak to you, you know our longer-term outlook for interest rates and sort of rise that we’re talking about. It’s going to get very interesting in terms of the investment choices people are going to make about four or five years from now.

We’ll talk about that some more at the March 20th virtual summit. The ITR virtual summit is going to be on March 20th. And I’ll make sure I bring some of that discussion to that particular webinar. Hope you can make it and we’ll see you next week, February 7th for more Fed Watch.