The new economic data released on Friday have brought... mixed feelings to the markets and investors.
Why? Because we're seeing a bit of everything. Inflation is rising. GDP is falling. Consumer confidence is rising. Incomes are falling. And the Fed doesn't know where to begin.
We're essentially looking at an economic landscape that resembles a roller coaster. On the one hand, they tell us the economy is resilient. On the other hand, the numbers show cracks. And amidst all this, we have to draw conclusions about our investments.
ECONOMIC DATA
So, on Friday, new data on inflation was released, through the Fed’s favorite index — Core PCE. And what did we see? A rise of +0.2% in May, compared to just +0.1% in April.
On an annual basis, it rose to 2.7%, above the Fed’s 2% target, and above expectations.
In other words, inflation is... picking up steam again. And for the Fed, that means one thing: caution. When the main indicator the Central Bank itself monitors starts climbing again, you can’t just go on like nothing’s happening.
At the same time, GDP and personal incomes... went downhill. Personal income dropped -0.4% in May, versus an expected rise of +0.3%. Personal consumption also fell -0.1%, and the savings rate dropped from 4.9% to 4.5%. These are numbers that suggest an economic slowdown.
What does all this mean? That consumers are starting to pull back. Not so much out of fear, but because the numbers just don’t add up anymore. And that’s something that could seriously affect the economy's trajectory in the next quarter. If consumers cut back, growth slows. If growth slows, the Fed has to choose whether to fight inflation or support employment.
On the other hand, there was a small positive note: Consumer Sentiment rose to 60.7 points — the first increase in six months. Consumer expectations also improved. Nothing dramatic, but it’s a start. Even so, this positive came with footnotes: people expect inflation to rise in the future. So it’s optimism... with a question mark.
THE FED
Neel Kashkari from the Minneapolis Fed is forecasting two rate cuts in 2025, with the first likely coming in September. But caution: he clearly says the Fed shouldn’t lock itself into an easing path, because tariffs might cause an inflation shock later. It’s like driving with your foot on both the gas and the brake at the same time.
And that leads us to the big question: What will happen on July 9?
Because that’s when the “tariff pause” — the temporary suspension of tariffs — ends. If tariffs go up again, many businesses will be forced to pass the costs onto consumers. And that means... a new wave of inflation. We’re talking about something that could completely change the picture for the second half of 2025.
So the Fed finds itself caught between two fires:
(a) On one side, inflation is rising and they can’t cut rates.
(b) On the other side, income is falling and consumption is softening, which might require support.
What will they do in the end? No one knows. The chances of a rate cut in July are minimal. The market is now looking to September. And until then... we’ll have a lot more data to digest.
Posted Using INLEO
