PRIMER: US PCE and GDP due at 13:30GMT/08:30EST

US PCE (13:30GMT/08:30EST): PCE prices, the Fedʼs preferred inflation gauge, is expected to rise 0.3% M/M in December (prev. 0.2%), with the annual rate at 2.8% (unch). The core measure is expected to rise 0.3% M/M (prev. 0.2%), with the annual rate at 2.9% (prev. 2.8%). The data will be critical for policymakers and markets in assessing the future path of interest rates. Consensus expects December PCE to show firmer price pressures than recent CPI prints, with measures such as food and producer prices pointing to upside risks. Analysts note that the ‘wedgeʼ between CPI and PCE could produce a hotter PCE reading, partly because PCE places greater weight on categories where prices are rising more sharply. At his press conference following the FOMCʼs January meeting, Chair Powell said estimates based on CPI data indicate headline PCE rose 2.9% Y/Y in December, up from 2.8%, while core PCE, excluding food and energy, likely rose 3.0% Y/Y from 2.8%. He said the elevated readings largely reflect goods inflation boosted by tariffs. The Fedʼs December projections pencilled in one additional cut for 2026, though policymakers have recently indicated this depends on further progress towards the inflation target, given the labour market has outperformed expectations. Powell reiterated that decisions will be taken on a meeting-by-meeting basis, guided by data and the balance of risks. He said inflation has evolved broadly as expected but remains somewhat elevated, with no progress on core PCE last year as the overshoot was driven mainly by goods prices, tariffs and one-off factors rather than demand. Goods and tariff-related inflation are expected to peak around mid-year, with many effects already passed through. Powell said that if tariff effects on goods prices peak this year, it would signal scope to loosen policy. Short-term market-based inflation expectations have fully retraced since “Liberation Day”, while longer-term measures indicate confidence that inflation will return to 2%.

US GDP (13:30GMT/08:30EST): The preliminary Q4 GDP estimate is expected to show US growth cooling from Q3ʼs 4.4% annualised pace, with the consensus expecting 3.0%. The Atlanta Fedʼs GDPNow tracker is modelling growth at 3.0%, revised down after softer core retail sales in December and downward revisions to November, pointing to moderation in consumer spending from the prior quarter’s 3.5% pace. Activity nevertheless appears resilient. In its December SEP, the Fed projected 2026 growth at 2.3%, upgraded from 1.8% in its September forecasts; in January, the FOMC described the economy as expanding at a “solid pace”, while Chair Powell said growth is on a firm footing despite trade policy changes, cautioning that quarterly GDP can be volatile. Vice Chair Jefferson has struck a cautiously optimistic tone on 2026, expecting growth slightly above trend. He highlighted the possibility that productivity gains, including from AI investment, could allow faster expansion without reigniting inflation, though he stressed it is too early to assess their durability. Some analysts say focus will be on whether Q4 confirms a controlled slowdown rather than a sharper loss of momentum, and the implications for policy. The Fedʼs rate path appears to hinge on further progress towards its 2% inflation goal, with most policymakers seeking clearer evidence of disinflation before backing lower rates.