New data hints at a brewing conflict between the U.S. Federal Reserve’s inflation and employment goals. Inflation remained stubborn in January, while consumer spending unexpectedly dipped, adding complexity to the Fed’s rate-cut decisions.
Despite traders betting on quarter-point cuts in June and September, analysts warn the Fed may face stagflation — slow growth paired with high inflation. “It’s a dilemma for the Fed,” said Peter Cardillo, chief market economist at Spartan Capital Securities.
Kansas City Fed President Jeffrey Schmid echoed these concerns, highlighting the challenge of balancing inflation risks against slowing growth. Inflation, measured by the core PCE index, fell slightly to 2.6% in January, still above the Fed’s 2% target.
Consumer confidence also took a hit, with spending declining after a surge in December, likely tied to pre-emptive buying ahead of new tariffs. The Fed is closely watching upcoming data, especially the economic fallout from Trump’s import levies — including a 25% tariff on Mexico and Canada and increased duties on Chinese goods.
So far, Fed officials, including Governor Adriana Kugler and Cleveland Fed’s Beth Hammack, suggest rates, currently at 4.25%-4.50%, may hold steady unless unemployment rises sharply.
All eyes are now on Fed Chair Jerome Powell’s remarks next Friday, alongside February’s job report, as markets seek clarity on the central bank’s next move.
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