GDP growth slows and PCE inflation is stubborn as Fed rate cut hopes dim
The odds of another Federal Reserve rate interest cut fell on Friday morning, after key reports on GDP and inflation. First, the GDP report showed that the U.S. economy slowed pretty dramatically at the end of 2025, in part because of the record-long government shutdown. On an annualized basis, GDP growth fell to 1.4% in the fourth quarter, from 4.4% in the third quarter. Economists had broadly expected fourth-quarter GDP to come in at 3%, so Friday's report landed with an unusual thud.
For the full year, GDP growth came in at 2.2%, down from 2.8% in 2024.
Declines in government spending had much to do with the disappointing numbers. Federal spending fell at a 5.1% annualized rate, and the BEA estimates that the October-November government shutdown alone knocked about a full percentage point off Q4 growth. Exports also fell as trade uncertainty dominated.
When the government stopped spending, private domestic demand — a metric that reflects what American consumers and businesses were doing — mostly held up, growing 2.4% in the quarter, only slightly slower compared with the third-quarter numbers.
Consumers kept spending, primarily on services such as health care and travel, rather than consumer goods. Business investment ticked higher, with the most notable gains perhaps unsurprisingly concentrated in “information processing equipment” — that is, AI-related infrastructure.
Friday’s PCE report likewise brought mixed news. Inflation came in at 2.9% for the quarter, and core PCE — which does not include food and energy — came in at 2.7%. On a monthly basis, core PCE rose 0.4% in December, putting the year-over-year rate at 3.0%. That may not be the scariest number analysts have seen in recent years, but it does suggest inflation is alive and kicking.
In all, it’s a set of numbers that means it’s less likely that the Federal Reserve will lower rates next month.
“Taken together, the data fits the soft landing narrative: growth is slowing but still positive, and inflation is easing but not collapsing,” said Daniela Hathorn, a senior analyst at Capital.com. “It supports the idea that the Federal Reserve can remain patient rather than pivot aggressively. The economy appears to be decelerating in an orderly fashion, reducing overheating risks without triggering a sharp downturn. However, the slightly firmer inflation prints may temper expectations of rapid rate cuts in the near term.”
Shortly before the reports were released Friday, President Donald Trump posted a demand on Truth Social for “LOWER INTEREST RATES,” along with a familiar attack on Fed Chair Jerome Powell: “‘Two Late’ Powell is the worst!!!”
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