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.