The Fed’s job did not just get easier 

This is a segment from the Forward Guidance newsletter. To read full editions, subscribe.

---

The Fed’s favorite inflation gauge inched down just slightly in January, but we remain a ways off from its 2% target. 

Decreased consumer spending and sharp income growth complicate the central bank’s mandate, and throw a wrench in the works for those hoping it would be a quarter of economic expansion. 

Here’s a rundown of the latest personal consumer expenditures print and what it means for interest rates, markets and economic growth. 

The PCE index rose 2.5% annually in January, down from 2.6% in December. Core PCE, which excludes volatile food and energy costs, saw more of a decline, coming in at 2.6% in January vs. 2.9% in December. 

Personal income increased 0.9% month over month, led by private wages and salaries, the Bureau of Economic Analysis said. Personal current transfer receipts, which reflect payments made without the exchange of services, also increased sharply, although this can be attributed to beginning-of-year Social Security payment adjustments. 

Consumer spending was down in January, coming in 0.2% lower than the month prior. The biggest sectors that saw a drop in spending were motor vehicles, household furnishings and recreational goods. 

This latest data significantly lowered expectations for Q1 GDP outlook. The Atlanta Fed’s GDPNow model was revised today to project the US economy will contract by 1.5% during the first three months of 2025. This would be the first contraction recorded since Q1 2022. 

On Feb. 19, the model had called for expansion at a rate of 2.3% during the first quarter of this year. 

In terms of market impact, stocks initially rose slightly on the mild decline in headline PCE, although quickly erased any gains as geopolitical tensions took center stage. President Trump’s Friday meeting with Ukrainian President Volodymyr Zelensky did little to assure the world that Russian-Ukrainian negotiations are going well. 

Fed funds futures markets are still calling for central bankers to hold interest rates at their next meeting on March 19, pricing in a 94% probability of this outcome. 

We’ll have to wait and see how Powell is thinking about the long-term outlook. On the one hand, it’s encouraging to see headline inflation dipping — even if only slightly — but we can’t imagine he’s too satisfied with the current labor market situation. 

---

Get the news in your inbox. Explore Blockworks newsletters:

• Blockworks Daily: The newsletter that helps thousands of investors understand crypto and the markets, by Byron Gilliam.
• Empire: Start your morning with the top news and analysis to inform your day in crypto.
• Forward Guidance: Reporting and analysis on the growing intersection of crypto and macroeconomics, policy and finance.
• 0xResearch: Alpha directly in your inbox. Market highlights, data, degen trade ideas, governance updates, token performance and more.
• Lightspeed: Built for Solana investors, developers and community members. The latest from one of crypto’s hottest networks.
• The Drop: For crypto collectors and traders, covering apps, games, memes and more.
• Supply Shock: Tracking Bitcoin’s rise from internet plaything worth less than a penny to global phenomenon disrupting money as we know it.