Fed Watch – 6/27/2025

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

Hi, I’m Lauren Saidel-Baker, and thank you so much for joining me for this June 27th edition of ITR Economics Fed Watch.

It’s been a pretty big week for the Fed between testimony on Capitol Hill and a couple of big data releases this week. So let’s get right into what this means for policy going forward. Well, the first data release I want to talk about is one that came out just this morning, that is the PCE inflation data. On a headline view, Personal Consumption Expenditures Price Index was up 2.3%. Now that was slightly hotter than expectations, but again, still in that low 2% range. This is nothing to really get concerned about, at least quite yet. And on a core basis, that is the Fed’s preferred inflation measure, excluding food and energy, PCE rating was up 2.7%. So a little bit hotter than had been expected, still below that 3% range, but what does this mean for policy moving forward?

Well, for anyone expecting imminent rate cuts, this isn’t great news. Again, this is nothing to be too concerned about. We knew that inflation is still hovering in this slightly disinflationary, but starting to show signs of life, region. And if you’ve been following our fundamental drivers, we at ITR have been saying for quite some time now that mid 2025, that’s when the fundamentals really do come back for a pickup in inflation. I don’t want to scare anyone. This is not a pickup to the highs that we saw this previous cycle, but this is a slightly higher baseline inflation than I think most of our consumers and business worlds have become accustomed to really in that ultra low inflation and ultra low interest rate environment leading up to COVID.

So let’s take a turn and pivot to another big release this week. That was the third estimate for GDP. Again, headline here is a little bit concerning. You would have seen that downward revision to estimates overall first quarter 2025 GDP estimated to have decreased 0.5%. That was down from 0.3% in the first estimate. So we’re still in that same slight contractionary standpoint. But quick reminder, we here at ITR Economics, we’re not using that sequential quarter-to-quarter growth rate. We really wanna focus on the overall rates-of-change. For GDP, we prefer that 3/12 measure. That is this quarter of data, compared to the same quarter one year ago, or in this case, 1Q of 2024.

Now on that metric, we’re still in a slowing growth trend, but it is a growth trend. And if we do distill down into this GDP result, really the big detractor was imports. Imports in the third estimate were slightly less negative than they had been in the first and second estimate, but it was all of that front loading. Businesses who knew tariffs were coming, who wanted to get their imports into the United States before that tariff cost, that additional tax was put on their goods, that was the big subtractor. Mathematically, imports are subtracted from GDP. So this front loading, this shift in timing, it’s a quirk of the timing, a quirk of the calendar, and when we knew tariffs were coming in, but it’s not a fundamental bottoming out of the US economy.

We did see consumer spending come in slightly less positive than had been previously estimated, but again, the consumer is on stable footing. This was still growth in consumer spending, even on that quarter-to-quarter basis. And at the end of the day, we see the labor market holding in. Our metric between the number of unemployed workers and the number of job openings, which had last month crept above that one-to-one ratio, it fell back. We’re at about 83% of a worker for each available job opening today. So as long as we have that tight labor market for demographic reasons, we think that trend will persist for the near term at least. This is going to support the consumer. That’s going to support wage growth thus far at a higher rate than overall consumer price inflation. That means our economy is still on pretty stable footing.

So for the Federal Reserve, I don’t see much reason to cut rates, despite what some outside news sources might be saying. We here at ITR are saying stay the course, watch those fundamentals. No reason to change the outlook at this point.

Thank you so much for joining me for this episode of ITR Economics Fed Watch. We’ll be off next week for the 4th of July, wishing you a safe and very fun holiday, but we’ll see you back right here on the 11th for the next ITR Economics Fed Watch. Take care.