Fed to Stay the Course Despite a Mild Economic Slowdown

Market Analysis

US economic growth weakened unexpectedly at the end of 2025, but persistent inflation means the Federal Reserve is likely to keep policy on hold for now. Fresh data from the Bureau of Economic Analysis (BEA) showed that annualized GDP growth in the fourth quarter was revised down to just 0.7 percent from an initial 1.4 percent estimate. For the full year 2025 GDP increased by 2.1 percent, 0.1 percentage point lower than previously reported.

The slowdown was nevertheless uneven. Consumer spending and business investment made positive contributions, while declines in government spending and exports partly offset those gains. Price pressure remains a central concern: the PCE price index rose 2.6 percent in 2025 and core PCE the Feds preferred inflation gauge that excludes food and energy climbed 2.8 percent. More recent BEA figures for January showed a 0.4 percent month-on-month rise in personal consumption and in personal incomes, while the monthly PCE deflator indicated only modest additional inflation pressure. On an annual basis the headline rate slipped marginally from 2.9 percent to 2.8 percent, but the core rate rose from 3.0 percent to 3.1 percent more than a full percentage point above the Feds 2 percent objective.

Given that backdrop, market tools and analysts expect the Fed to maintain the current target range for the federal funds rate at the upcoming FOMC meeting and again at the April gathering. The CME Groups FedWatch tool currently prices in a continuation of the rate pause, with the first meaningful chance of a rate cut rising only by September, where it assigns roughly a 50 percent probability. Most Fed officials now expect, on average, a single 25 basis-point cut by year-end, but geopolitical uncertainty tied to the Iran conflict could introduce wide swings in those forecasts.

Wednesdays FOMC statement will include updated economic projections for growth, inflation and the federal funds rate. Yet it is already clear that the internal debate at the Fed will harden. dIsagreements are rising even as formal votes traditionally produce unified outcomes. That divide looks likely to expand once the nominated Fed chair, Kevin Warsh, takes office.

Political appointments are shaping that debate. Several Fed board members named by President Donald Trump have pressed for easing monetary policy despite ongoing inflation, arguing that tighter rates risk deepening labor-market weakness. Meanwhile, moderates including current Fed Chair Jerome Powell describe the stance as well positioned and favor keeping policy on hold rather than moving pre-emptively.

The labor market is central to the disagreement. Job creation slowed sharply over 2025: after a modest 126,000 increase in January, payrolls fell by 92,000 in February, and the average monthly gain for the year was only 15,000. The 12 voting members of the FOMC broadly acknowledge labor-market softness, but they differ on whether the greater near-term risk is continued weak hiring or a renewed burst of inflation.

Geopolitics and energy prices complicate the outlook. The Iran war has already pushed oil prices higher, and policymakers must weigh whether recent moves are a one-off shock or the start of a more persistent rise in energy costs. If elevated energy prices feed through to rents, transportation and heating expenses, the core PCE could be subject to further upward pressure.

All told, the updated data increase the complexity of the Feds task without changing the immediate policy outlook: inflation remains above target and growth has softened, so the most likely near-term outcome is a continued pause. Markets will be watching the FOMC projections and any shift in the balance of risks for clearer signals about the timing and size of future rate cuts.

Key Takeaway

A mild endtoyear growth slowdown has not materially changed the Feds calibration: with core inflation still elevated, officials are likely to keep the policy rate steady for now. The first meaningful probability of a cut is still concentrated later in the year, but geopolitical and energy risks could alter that timeline.