Market News: Fed’s Core PCE Inflation Runs Hot as Q4 GDP Slows Sharply, Rate-Cut Odds Fade

U.S. markets turned cautious after the Federal Reserve’s preferred inflation gauge came in hotter than expected while fourth-quarter economic growth slowed more than forecast, complicating the outlook for interest rate cuts.S&P 500 futures extended losses following the data release, while Treasury yields edged lower as investors recalibrated expectations for Federal Reserve policy. Markets are also navigating geopolitical tensions and trade-related uncertainty tied to Donald Trump.Core PCE Inflation Tops ExpectationsThe core Personal Consumption Expenditures (PCE) price index — the Fed’s key inflation measure — rose 0.4% month-over-month, slightly stronger than expected. On a 12-month basis, core PCE inflation stood at 3.0%, underscoring persistent price pressures.However, part of the monthly jump was driven by a 1.78% increase in portfolio management prices, which tend to track equity markets and may exaggerate underlying inflation momentum.Inflation Breakdown:Core goods: +0.43% MoM, +1.97% YoYCore services: +0.33% MoM, +3.3% YoYMarket-based core PCE (Fed focus metric): 2.7% YoY, up from 2.5%The uptick in market-based measures may concern policymakers monitoring underlying price trends.Q4 GDP Growth Slows More Than ExpectedU.S. GDP grew 1.4% in Q4, a sharp slowdown from 4.4% in Q3 and below consensus expectations.Several components weighed on growth:Goods spending: -0.1%Services spending: +3.4% (boosted by healthcare outlays)Private domestic investment: +3.8%Government spending: -5.1%, subtracting nearly 0.9 percentage points from GDPFederal-level spending declined 16.6% during the quarter, reflecting shutdown effects.While headline GDP slowed, private sales to final domestic purchasers — closely watched by the Fed — rose 2.4%, signaling moderate underlying demand.Fed Rate-Cut Expectations DiminishFollowing the inflation and GDP reports, markets trimmed expectations for near-term rate cuts, according to CME Group’s FedWatch Tool:March 18 meeting: 6% odds of a rate cutApril 29 meeting: 20% oddsJune 17 meeting: 56% odds, down from 58%A stabilizing labor market and stubborn inflation have pushed expectations for policy easing further into the second half of the year.Market ReactionS&P 500 futures: -0.3%10-year Treasury yield: 4.06% (down 1 basis point)Equities remain below key technical levels, with the S&P 500 trading under its 50-day moving average following a brief rally earlier in the week.Macro Crosscurrents IntensifyBeyond inflation and growth data, investors are monitoring:Trade deficit expansion to $70.3 billion in DecemberOngoing geopolitical tensions, including potential conflict with IranA possible Supreme Court ruling related to tariff policyWith inflation still above the Fed’s 2% target and growth cooling, markets face a delicate balancing act. The data reinforces a central theme: rate cuts may be delayed unless inflation shows clearer and sustained progress lower.