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) cut interest rates by 1% in 2024, but markets anticipate fewer cuts in 2025. The probability of a rate cut at the January FOMC meeting, concluding January 29, remains in the low single digits. A stronger-than-expected economy and rising inflation expectations have shifted sentiment. While conditions could change rapidly, as they did following the Fed’s 0.5% rate cut in September, an extended rate pause is currently priced in by markets.

The data supports this rate outlook. December’s jobs report showed unexpected strength, with employers adding 256,000 jobs, the most in nine months, and the unemployment rate edged lower to 4.1%. Labor market growth accelerated in the fourth quarter after a sluggish mid-year, and initial jobless claims remain at historically low levels. Inflation, though in a downtrend from the 2022 peak, is still above the Fed’s 2.0% target. Higher food and energy prices pushed headline CPI up 0.4% in December, lifting the annual rate from 2.7% to 2.9%. Core CPI, which excludes volatile categories, rose 0.2% for the month, keeping the annual rate above 3.0%.

The Fed’s path forward in the near-term remains uncertain. Sticky inflation and a resilient labor market give the Fed room to pause as they await further cooling in price pressures. The December dot plot reflected less monetary easing in 2025, projecting a median of two rate cuts. Accordingly, we are shifting the Fed-O-Meter to signal an extended pause in rate cuts through at least the next few FOMC meetings.