Macro and Market Trends January 2025: Fed keeps rate on hold as consumer spending fuels US growth

In December, the US labour market saw a significant surge with non-farm payrolls increasing by 256,000, surpassing the expected 160,000. November’s figure was revised to 212,000 from 227,000. The unemployment rate dropped to 4.1%, better than the predicted 4.2%. Other measures, like the ADP National Employment Report and JOLTS, indicated a strong rise in job vacancies in November.

This data suggests a ‘Goldilocks’ scenario where the labour market is expanding without causing significant wage inflation. Investor’s reactions were mixed, with US 10- and two-year treasury bond yields rising by nearly 10 basis points, and S&P 500 futures dropping 1% in pre-market trading.

The strong payroll data highlights US economic strength and this may give the Federal Reserve (Fed) more reason to hold interest rates steady for at least the first half of the year.

December’s inflation data in the UK came in below expectations at 2.5% (consensus: 2.6%), down from 2.6% in November. Core Consumer Prices Index (CPI) inflation (excluding energy, food, alcohol, and tobacco) was 3.2% (consensus: 3.4%), down from 3.5% in November. Services CPI inflation remained high at 4.4% year-on-year, driven by a 7% annual increase in rental prices. Goods CPI inflation was 0.7% year-on-year, dragging down the overall rate.

Inflation is expected to accelerate slightly in 2025, influenced by the rise in the National Minimum Wage and Employers National Insurance from April. Rising oil prices, with Brent Crude above $80 a barrel, are also a concern.

Persistent inflation may lead the Bank of England to take a cautious approach to cutting interest rates in 2025.

Confidence in the gilt market remains fragile, with the 10-year yield at 4.9%, the highest since the 2008 financial crisis. The Office for Budget Responsibility’s Spring forecast on 26 March will be crucial. If economic growth is revised lower, the government may need to raise taxes or cut spending to maintain fiscal credibility.

Despite gilt market volatility, the UK stock market has been resilient, supported by global economic growth, policy easing and technological innovation. A weaker sterling against the dollar may also benefit UK stocks through dollar-denominated earnings from abroad.

The Federal Open Market Committee (FOMC) voted to keep interest rates on hold at 4.25-4.50%. This was consistent with expectations and follows the 100 basis points of interest rate cuts delivered in the final three meetings of 2024.

This year, President Donald Trump has hit the ground running with a broad range of executive orders, but his full policy agenda remains unclear. News on what he will charge when it comes to tariffs changes, but at the time of writing administration says it will impose 25% tariffs on goods from Canada and Mexico and a 10% tariff on Chinese goods. In anticipation of this, the committee’s inflation forecasts were revised upwards in December to reflect the potential for Trump’s policies to be inflationary.

However, with the underlying economy continuing to look resilient, it seems the Fed is comfortable to maintain its cautious stance as it adopts a ‘wait and see’ approach and gives itself time to evaluate incoming economic data and the policies pursued by Trump’s administration.

US real gross domestic product (GDP) increased by 2.3% in the fourth quarter of 2024, according to the US Bureau of Economic Analysis (BEA). It’s weaker than economists’ prediction of 2.6%. but was in line with the Federal Reserve of Atlanta (Atlanta Fed) estimate of 2.3%.  

The key driver of growth came from resilient consumer consumption with retail sales data showing increases in spending between October and December. This resulted in a 2.8 percentage point contribution to the real GDP figure for the fourth quarter - the largest contribution from this category since the first quarter of 2023.  

Buoyant labour markets have supported consumer spending and remains a key reason to why US growth has held up. Even with the rapid rise in interest rates, the unemployment rate remains low. There were 207,000 initial jobless claims for the quarter, which is far lower than the long-term average of 360,000.  

While consumption experienced its best quarter since the start of 2023, inventory accumulation experienced its worst, with the category taking 0.9 percentage points off the fourth quarter’s GDP numbers. However, given the recent consumption data, and the relatively strong US economic prospects for 2025, inventories could become a tailwind for growth this year as businesses replenish stock. 

Net trade was flat for the quarter, while government expenditure added 0.4 percentage points and fixed investment subtracted 0.1 percentage points. 

With the US economy continuing to expand and consumption remaining strong and expansionary fiscal policy from President Trump potentially on the horizon, we remain confident that the growth outlook for the US will continue to be constructive over 2025. 

If you have any questions about how these announcements can impact your portfolio and investment decisions, please contact your usual Evelyn Partners adviser.