The major inflation data released this week was right on target. While GDP growth exceeded expectations, its impact was minor. As a result, mortgage rates ended the week with little change.
Fed officials keep a close eye on inflation, and the PCE price index is their favored indicator. In December, core PCE, which excludes food and energy to reduce short-term volatility, was up 2.9% from a year ago. This was down from an annual rate of 3.2% last month and the lowest level since March 2021. While still moving in the right direction, it remains above the Fed’s target of 2.0%.
Gross Domestic Product (GDP) is the broadest measure of economic activity. During the fourth quarter, U.S. GDP rose at an annualized rate of 3.3%, above the consensus forecast of 2.0% but down from 4.9% during the third quarter of 2023. Strength was seen in consumer and government spending, business investment, and inventory growth. Despite higher interest rates, the economy has remained surprisingly resilient and has shown few signs that it will enter a recession.
After ten consecutive hikes since early 2022, the European Central Bank (ECB) held benchmark interest rates steady for the third meeting in a row as expected. The statement released after the meeting again emphasized that future monetary policy decisions will be based on incoming economic data. During the press conference, ECB President Lagarde said that any discussion of a rate cut is “premature.” Similar to the U.S. Fed, the ECB is still planning to hold rates near current levels for now to help bring down inflation.
The next Fed meeting will take place on Wednesday. While no change in rates is expected, investors will look for guidance on the anticipated timing of rate cuts later in the year. For economic reports, the ISM national manufacturing index will come out on Thursday. The key Employment report will be released on Friday, and these figures on the number of jobs, the unemployment rate, and wage inflation will be some of the most highly anticipated economic data of the month.
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