U.S. Economic Growth Slows as Inflation Concerns Rise
The latest economic report suggests a notable deceleration in U.S. economic growth, raising questions about the Federal Reserve’s ability to implement further interest rate cuts. On Friday, new data from the Commerce Department revealed that gross domestic product (GDP) increased at an annualized rate of just 1.4% during the fourth quarter of 2025, falling short of the anticipated 2.5% growth.
Throughout 2025, the economy expanded by 2.2%, a decline from the 2.8% growth recorded in 2024.
In a separate report, the Fed’s preferred inflation measure, the PCE price index, climbed to 2.9% in December, surpassing the expected 2.7%. Furthermore, the core PCE, which removes the effects of volatile food and energy costs, demonstrated a 3% increase over the past year. Although these figures were somewhat in line with expectations, they exceeded the Fed’s target of 2%, hinting that the effort to control inflation is faltering.
Chris Zaccarelli, chief investment officer at Northlight Asset Management, remarked that this report reinforces the existing divide within the Federal Reserve, describing the struggle between hawks and doves as ongoing.
Minutes from the Fed’s January meeting, made public on Wednesday, indicated an increased reluctance among policymakers to lower interest rates this year.
In response to the disappointing GDP figures, President Trump posted on Truth Social, attributing the growth slowdown to last year’s significant government shutdown. He claimed that the shutdown inflicted at least a two-point GDP loss on the country, criticizing Federal Reserve Chairman Jerome Powell for being “late twice” in his decisions.
The recent GDP figures dropped sharply from a robust 4.4% in the third quarter, with the Commerce Department attributing part of this decline to the government shutdown, but also pointing to weak consumer spending and exports.
Zaccarelli described the initial GDP report as “disappointing,” suggesting that if the shutdown hadn’t occurred, the growth could be closer to 2.4%. Yet, he acknowledged the challenges in accurately assessing these adjustments.
The PCE report has further solidified the rationale for the Fed to hold off on rate cuts, with inflation rising by 0.4% and the services sector up by 0.3%, indicating widespread price pressures beyond just specific sectors.
Rick Gardner, chief investment officer at RGA Investments, noted that, despite the data being somewhat dated, it highlights that the Fed still faces significant inflation challenges.
Government spending and investment took a hit, falling by 5.1%, largely due to a 16.6% drop in federal spending attributed to the shutdown. However, there were some positive signals within the economy. Final sales to domestic private buyers rose by 2.4%, and gross private domestic investment saw a 3.8% increase.
