The economic expansion has advanced from the initial recovery, and the focus is now on metrics the Federal Reserve is looking at to gauge the health of the economy. Since the Fed’s dual mandate is to keep prices stable and maximize employment, we will focus on labor and inflation metrics, keeping in mind the broader economic impact as well. We created a Fed Monitor to track some of the data points that will impact the Fed’s decisions to tighten financial conditions. Additionally, we try to quantify the data and information outside of the dashboard to determine if the Fed is being more dovish than the data, and likely to be more aggressive in the future, or if they are being hawkish relative to the data, and likely to be more conservative in the future.

The Federal Reserve (Fed) held interest rates steady at the upper bound range of 4.5% in January and set expectations for an extended pause on rate activity. Fed Chair Jerome Powell stated that the Fed is “in no hurry” to cut interest rates, though markets are pricing in one rate cut before the year is over. The Fed wants to see more progress on inflation before reducing interest rates. The economy is strong enough to give the Fed some breathing room.

The data dependent Fed is dealing with sticky inflation and a stabilizing labor market. Inflation accelerated to the upside in January, as headline CPI increased by 0.5% M/M, marking the strongest monthly increase since August 2023, driving CPI above 3% Y/Y. Core CPI, which excludes food and shelter, rose 0.4% last month, pushing the annual pace to 3.3%. The labor market is in a good spot at the moment. While the economy added only 143,000 new jobs in January, the 3-month average is a robust 237,000. Furthermore, the unemployment rate fell to an 8-month low of 4.0% and initial jobless claims are near their lowest levels in decades.

We anticipate a prolonged pause in Fed activity, but rate cuts could resume later in the year, similar to the path the Fed took last year. Patience will be needed for inflation to show a more durable path towards the Fed’s long-term target of 2.0%. The Fed-O-Meter will remain in place for now.