Sticky Inflation Likely to Keep Fed on Hold Despite Weaker Economy

Economic Growth and Inflation - Real GDP growth in the fourth quarter was 1.4%, significantly below the consensus estimate of 2.5%, primarily impacted by a government shutdown [2][8] - The Fed's preferred inflation gauge rose to 3% year-over-year in December, up from 2.8% in November, indicating potential stagnation in progress towards the 2% target [2][8] Federal Reserve's Policy Outlook - The higher inflation reading justifies the Federal Reserve's decision to pause interest rate cuts for the time being, with expectations of two potential rate cuts by year-end if inflation trends downward [3][4] - Fed officials are cautious about further rate cuts until inflation returns to target levels, despite the economy showing resilience in certain sectors [4][7] Consumer and Business Spending Trends - Consumer spending has been robust, but it is increasingly reliant on reduced savings rather than significant wage increases, raising concerns about sustainability [10] - Business investment, particularly in technology, continues to grow, indicating a divergence between tech-related sectors and the broader economy [9][10] Future Economic Projections - Analysts anticipate that inflation will decline in 2026, supported by softening rental prices and diminishing tariff pressures, which could lead to a more favorable economic environment [5][8] - Despite some optimism, there are concerns that the economy's momentum may wane this year, particularly in residential investment, which fell by 1.5% [9]