March 15-21, 2025
Big news. Of course, the main news is that the Fed rate is being maintained. This is especially relevant given that Trump has clearly hinted that it needs to be lowered. This is natural, Trump wants to restore domestic production (more on that in the final section of the Review), so the loan should be as low as possible. But Powell has a different opinion on this matter.
So, the US Federal Reserve kept the rate at 4.25-4.5% per annum.
Cover letter from the Federal Reserve
▪️ Economic activity continues to grow at a steady pace.
▪️ The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain stable.
▪️ Inflation remains slightly elevated.
▪️ From April, the Fed will slow the pace of contraction of the QT balance to $5b per month previously = $25b.
▪️ The Fed is attentive to the risks for both sides of the dual mandate inflation labor market.
▪️ Uncertainty about the economic outlook has increased.
▪️ The Fed is ready to change the monetary policy if US macro data requires it.
▪️The Fed has lowered its GDP growth forecast for 2025 from 2.1% to 1.7%.
▪️The average unemployment rate forecast for 2025 has been raised from 4.3% to 4.4%.
▪️The PCE inflation forecast for 2025 has been raised to 2.7% from 2.5%.
▪️Fed rate forecasts: a 50 bp cut in 2025 and another 50 bp in 2026.
Comments and additions in the final section.
Macroeconomics. As usual, we are closely monitoring China, which has pleased us this week.
Fixed capital investment +4.1% per year, significantly better than expectations (+3.6%) and the results of 2024 (+3.2%):
Рис. 1
Industrial production slowed from +6.2% to +5.9% per year, but beat forecasts (+5.3%):
Рис. 2
Retail sales accelerated from +3.7% to +4.0% per year:
Рис. 3
New building prices -4.8% per year, minimum decline in 8 months:
Рис. 4
And only unemployment increased to a 2-year high:
Рис. 5
Japan Industrial Output -1.1% MoM, 3rd Consecutive Minus:
Рис. 6
The New York Fed manufacturing index in the US is the weakest in 14 months (but still slightly above forecast):
Рис. 7
US housing market indicator hits 15-month low:
Рис. 8
Canada’s CPI (consumer inflation index) is +1.1% per month; in the last 34 years, it has only been higher three times, in 2013 and twice in 2022:
Рис. 9
The official unemployment rate in Britain has returned to a 13-year high (excluding Covid for now):
Рис. 10
Brazil’s central bank raised its rate by 1.00% to 14.25%, its highest level since the beginning of the century:
Рис. 11
Рис. 12
The Swiss Central Bank has cut the rate by 0.25% to 0.25% – this is already its 5th reduction, and the interest rate has practically returned to zero.
The Chinese Central Bank kept interest rates unchanged, but is ready to reduce them and the reserve requirement “at the right moment”. We have already written about the US Federal Reserve.
The Japanese Central Bank left rates at the previous level of 0.5%, the highest since 2008. The Indonesian Central Bank also did not change anything, as did the Swedish Central Bank and the Bank of England.
But in Thailand, you can note the stock exchange index chart. It is at the worst levels since the Covid era, a breakout of the then lows will throw the indicator back to the 2011 values:
Рис. 13
And gold continues its triumphant march – its price rose above $3050 per ounce:
Рис. 14
Main conclusions: At a press conference following the Federal Reserve’s Open Market Committee meeting, Powell made the following points:
▪️The US economy is strong.
▪️The situation in the labor market remains stable.
▪️Inflation remains slightly elevated.
▪️The latest macro data points to a slowdown in consumer spending.
▪️The Fed has decided to slow the pace of the QT balance sheet contraction.
▪️Economic uncertainty has increased.
▪️Consumer spending prices rose by 2.5% in December.
▪️The labor market is not a source of inflationary pressure.
▪️Inflation expectations have recently increased, with tariffs becoming the driving factor.
▪️Long-term inflation expectations are in line with the 2% target.
▪️We don’t need to rush the Fed rate decision, we are willing to wait for more clarity.
▪️The new administration is implementing significant policy changes, it is necessary to assess the impact on the US economy.
▪️Economic uncertainty is unusually high, we are not on course.
▪️If the labor market weakens, we can ease the Fed monetary policy.
▪️We have seen some signs of increased tension in money markets. Market indicators suggest that reserves are sufficient.
▪️Today we focused on labor market dynamics and the maximum employment target.
▪️Inflation rose due to changes in trade policy.
▪️The change in forecasts occurred amid high economic uncertainty.
▪️Long-term inflation expectations are generally well anchored.
▪️We will watch inflation expectations very closely.
▪️We see fairly robust economic data.
▪️Baseline scenario: no change in economic forecasts, then we will return to Fed rate cuts.
▪️Fed monetary policy is in good shape, waiting for more economic clarity is the right call.
▪️Hiring and layoffs remain low. A significant increase in layoffs would likely quickly lead to unemployment.
▪️We were approaching our price stability mandate of lower inflation.
Given the state of the labor market and the increase in the inflation forecast, doubts arise about its sincerity. The same considerations can be mentioned regarding the state of industry, the formal data for which were quite normal. But here we give the floor to Pavel Ryabov.
“In February, the American industry reached an absolute historical maximum, but … retrospective analysis is important.
Compared to last year, growth is 1.4%, +1.4% over two years, +2.5% over five years (by Feb. 20 before Covid restrictions), +2% over 10 years and +2.4% over 17 years (by Feb. 08).
Historical maximum – sounds proud, but can growth of 2-2.4% over 10 or 17 years be considered a success? Doubtful, so it is fair to talk about stagnation on a high base at the upper limit of the range.
There is no upward trend yet. Why? Over the past six months, growth is only 0.34% y/y, which is more likely within the margin of error of calculations, given the scale of data revision (up to 0.3-0.7%).
No change over two years (Sep. 24-Feb. 25 vs. Sep. 22-Feb. 23), and only 1.1% growth over five years, so there really is no upward trend.
The February data is not bad, more and more industries are moving into positive annual dynamics, plus expectations from the Trump administration’s stimulus measures (a turn in economic policy towards the real/production sector of the economy).
There is a non-zero probability of a repeat of the pattern of Trump’s first term. Then the industry also began to revive in February 2017 and growth continued until September 2018 in total by almost 5.7%, but then the peak of industrial recovery coincided with the peak of production activity in 2014, and the trigger was the energy sector after the restructuring of 2015-2016 (processes are not directly related to Trump).
▪️ Manufacturing production grew by 0.7% y/y, +0.1% over two years, +1.1% over 5 years and unchanged over 10 years, over the past six months growth has declined by 0.1% y/y, (-1%) over two years and only +0.1% over 5 years, i.e. stagnation.
▪️Mining and quarrying is unchanged y/y in February, +1.3% compared to Feb-23, +0.6% compared to Feb-20 and +9.5% compared to Feb-15, and a decrease of 0.1% y/y over half a year, +1.5% over two years and (-2%) over five years.
▪️Electric power and utilities are actively growing by 8.7% y/y, +10.6% compared to Feb-23, +10.1% compared to Feb-20, +4.6% compared to Feb-15, a growth of 1.9% y/y over six months, +3% over two years and +4.4% over five years.
The main “impact” contribution to industry is made by electricity, the growth of which may be associated with the active use of data centers for AI, but there is no exact decomposition or confirmation.” Well, we will add that no one has cancelled the inflated inflation, therefore, in reality, the growth indicators may also mean an outright decline (according to the most optimistic estimates, 3-3.5% should be subtracted from all growth indicators, and according to the pessimistic ones – 5-5.5%).
Let us note another important point and here we will also refer to Pavel Ryabov. We are talking about retail sales.
“The terrible data in January became even more terrible after a downward revision of 0.35% m/m, strengthening the negative momentum in January to minus 1.24% m/m, and the February data is close to zero – growth of only 0.2% m/m, which is lost against the backdrop of the crushing January.
There is reason to believe that the December and January data are distorted by incorrect seasonal adjustments; to eliminate this effect, you can compare February with November, where a decrease of 0.33% at par is noted.
The entire holiday and winter season ended in the minus, which is much worse than +0.54% in 2024, +1.89% in 2023 and +2% in 2021-2022. The last time there was a minus in nominal terms from November to February was in 2019 (-1.25%) and in 2015 (-1.31%), and even earlier in 2009 (-1.11%) and in 2008 (-1.85%), which increases, but does not guarantee, the risk of a recession.
Nov.24-Feb.25 vs. Nov.23-Feb.24 growth of 3.8% y/y in nominal terms and 3.5% y/y taking into account inflation, over two years growth of 6.2% and 6.2%, respectively (near-zero inflation in the commodity group), over three years +12.8% and +8.1%, and over 5 years (compared to Nov.19-Feb.20) +38% and +20.8%, respectively.
What ensured the growth in retail sales over the past three months compared to the corresponding period a year earlier?
– Automotive and components, having formed 29.1% of the total growth in retail sales at par or 1.11 p.p. in the total growth for the year.
– Online stores – 24.5% or 0.93 p.p.
– Food products – 11.2% or 0.39 p.p.
– Catering – 9.5% or 0.37 p.p.
– Hypermarkets and supermarkets of a wide range – 9.5% or 0.37 p.p.
The above categories form about 85% of the total growth in retail sales, while providing 72% of the total turnover in monetary terms.
The published data do not allow us to judge the reversal of retail sales with the risks of transition to a recession, since the monthly data is quite noisy, and the trend has not yet formed.
The graph shows that in the period from 2021 to 2023 there were at least three times with a sharp decline over two to three months without the formation of a downward trend, so it is too early to “sound the alarm”.
However, based on a combination of factors, we can note a high probability of a transition to low growth rates (range 1.5-2.5%, which is significantly lower than the “regular” rates at the level of 3-5%).
Consumer demand is about 68% of GDP, so a slowdown in consumer demand will immediately hit the US economy with all the ensuing consequences.”
Again, let’s take into account the clearly understated inflation, taking into account which it becomes somehow inconvenient to talk about growth. However, here it is necessary to mention once again the notorious word “recession”, which has no real relation to the description of the current situation. The fact is that when assessing the “entry into recession”, liberal economic science proceeds from the fact that the indicators are getting worse. And in a structural crisis, they practically do not change. And this means that it is enough to lower the zero scale (by understating inflation) and the recession disappears!
However, all these statistical games, which we only provide as an illustration of the basic theory, cannot deceive our readers, who have known for many years how things really are! With which we congratulate them and wish them to continue their fruitful work, not forgetting to rest regularly!