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PCE Inflation Jumps Ahead of Iran Conflict, Keeping Fed Hikes in Play
2 days ago•Source: MarketWatch
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Powell Signals Rates Could Move Either Way Amid Mixed Economic Signals
Powell said the U.S. economy faces mixed signals: downside labor-market risks argue for keeping rates low, while upside inflation risks argue against simply staying accommodative. The Fed remains committed to returning inflation to 2%, inflation expectations look stable, and there’s no immediate rate decision due to unresolved effects from the Iran war. The Fed’s March dot plot still indicates one rate cut in 2026, underscoring uncertainty about the policy path amid opposing forces.
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Trump’s Iran clock ticks: market bets on a quick end to curb inflation risk
Markets price a rapid, Venezuela II–style end to the Iran conflict that would push oil lower and bolster Trump’s inflation strategy; but if the war lasts longer than a month, oil could rise, inflation could accelerate, and Fed rate cuts could be delayed, complicating his economic messaging.
January data could redraw the Fed's roadmap on rates as inflation lingers
Investors await January's jobs report and CPI to gauge whether inflation continues to cool while the labor market stays resilient. Economists anticipate about 55,000 new jobs with unemployment near 4.4%, a 0.3% rise in CPI (core also ~0.3%), and a 2.5% year-over-year inflation rate, possible signs the Fed could begin easing later in 2026. The Fed just left rates unchanged amid inflation concerns, but officials warn the path is uncertain, making the January data crucial for policy and markets.
Wholesale inflation sticks around as Warsh emerges as Fed chair prospect
Wholesale prices jumped 0.5% in December, keeping the year-over-year wholesale inflation at 3% and signaling inflation will likely stay above the Fed’s 2% target into early 2026; core prices rose 0.4% for the month, leaving the 12-month core at 3.5%. With President Trump naming Kevin Warsh as his Fed chair pick, the central bank faces the challenge of cooling inflation while keeping policy rates steady.
Tariffs Fall Short: U.S. Trade Deficit Stays Near Record High
The U.S. trade deficit remains near record highs despite tariffs, after a brief dip earlier in 2025; November alone showed a jump to $56.8 billion as imports rose and exports fell. Even when removing tariff effects and gold flows, deficits stay large, with 2025 tracking to one of the year’s largest gaps. Economists say tariffs and a cheaper dollar help, but persistent import demand (notably from Mexico and Vietnam) and AI-related equipment needs keep the deficit elevated, even as Q4 looks to be the year’s smallest deficit and could modestly boost GDP.
January blues persist as Americans doubt the economy's strength
Americans started 2026 in a foul mood even as the economy shows growth and unemployment remains low, with consumer confidence sinking to a 12-year low (84.5). Persistent inflation around 3% and a softer job market weigh on sentiment, underscoring a disconnect between strong headlines and public mood.
Fed pause endures, but the big question is how long it lasts
Federal Reserve officials are expected to hold rates this week, while markets price in the first potential cut around July and economists remain divided on whether there will be any cuts this year, with some predicting a June move and others forecasting none, all amid inflation stuck above target and a still-important role for the labor market in the trajectory.
Trump hints Hassett stay, boosting Warsh's odds to chair the Fed
President Trump signaled he may keep Kevin Hassett in his current White House role, sending the Fed chair race into a new phase as Kevin Warsh’s odds jumped. Prediction markets showed Warsh favored (Kalshi around 58%, Hassett about 17%), with Polymarket echoing the tilt, and markets reacting to the Trump remarks amid broader concerns tied to Powell’s situation and Senate confirmation dynamics. Analysts say Warsh would likely be dovish like Hassett but could shift if the economy strengthens, making the outcome contingent on political timing and Senate approvals.
Powell Likely to Stay at the Fed After Trump’s Push
Powell’s term as Fed chair ends in May, but he can remain on the Fed board through 2028. Despite Trump’s attempt to push him out, a DOJ probe may actually increase Powell’s motivation to stay, preserving the central bank’s independence. Any replacement would require Senate confirmation, and if a chair isn’t confirmed by Powell’s departure, the Fed board could appoint a temporary chair. The outcome hinges on who Trump would nominate and the Senate’s actions.
Tariffs Push Prices Up Across U.S., Fed Beige Book Finds
MarketWatch reports the Federal Reserve’s Beige Book showing tariff-related cost pressures across the U.S. are pushing prices higher in most districts, with only two of twelve districts posting slight price growth and others contending with rising costs, including healthcare and insurance, signaling ongoing inflationary pressure into 2026.
US Labor Market Faces Stagnation and Uncertainty in 2025-2026
The US labor market in 2025 showed signs of slowdown with subdued job creation and a rising unemployment rate, but no signs of a recession. Job growth is expected to remain modest in 2026, with some analysts predicting a jobless expansion, though others see potential for stabilization or growth due to policy changes and economic measures. Overall, rapid job growth of previous years is unlikely to return soon.