When Data and Headlines Don’t Quite Match Up: Where We Stand on Markets and the Economy

An adage economists often hear is that “the key to forecasting well is to forecast often.” It is glib advice that is not only unhelpful but often detrimental. The temptation is clearly there, especially at a time of daily executive orders and tariff announcements of one kind or another. Yet, this is precisely when it must be most resisted.

This does not mean aloofness; it simply means that forecast changes should be based on durable shifts in policy and data trends. Distinguishing between the lasting and the transient is the difficult task at hand. Investors are well familiar with the “buy the rumor, sell the fact” approach. But when it comes to policy interpretation, there is a risk of buying not only the rumor, but purchasing the fact as well. The danger of double-counting is real.

What Has Moved—and Hasn’t Moved—Our Policy Rate Forecasts

In late August, we all thought that the personal savings rate was 3.1% in June and 2.9% in July 2024. These declining and historically low levels intensified concerns about the sustainability of strong consumer spending. In mid-September, our forecast was for US core PCE inflation to touch the 2.0% mark in the second quarter of 2025. We also had five Fed rate cuts projected for 2025. Fast forward to late September, when the Bureau of Economic Analysis released revised estimates that lifted the personal savings rate by about two percentage points—a dramatic move. Specifically, on September 27, new data put the personal savings rate for those two months at 5.2% and 4.9%, respectively! The implications were clear and profound: considerably more runway for consumer spending, higher 2025 real GDP growth, and less need for the Fed to cut rates. We immediately removed one of the five 2025 rate cuts from the forecast, even though our inflation forecast did not really change.

The outcome of the US election intensified the directional impact of both of these dynamics: stronger growth via deregulation and an “America First” approach, implying even less need for rate cuts. Another element entered the calculus: higher inflation via potential tariffs and immigration policies. In December, before the new administration even took office, we made some important changes to the forecast. We raised the 2025 real GDP growth forecast from 1.5% to 2.2%, core PCE inflation only bottomed at 2.4-2.5% y/y, and we took another Fed rate cut out of the forecast (for a total of three in 2025).

Impact of Today’s News Flurry: Pushing Back Timing of Next Cut

The fast and furious nature of the new administration’s policy implementation naturally raises the question of whether this is enough. It may not be. Most importantly, the early deployment of tariffs complicates the inflation picture enough that a March rate cut no longer looks plausible. This is quite unfortunate because January is poised to bring us the first retreat in y/y core PCE inflation since last June. Without the early tariff drama, the FOMC may have been willing to deliver another cut in March, but tariffs change the calculation from “cut if you can” to “cut if you must.” The “must” signal, if it were to be sent, was always going to come from the labor market. The January jobs report did not even come close. So March is off the table.

June seems more likely than May, so we pencil that in for timing of the next cut. But it is all a bit up in the air because the more the Fed waits, the more likely that tariffs would start showing in the inflation data. Ironically, a bit of a repeat of summer 2024, though then the inflation worries weren’t about tariffs.

We are also left wondering whether we should further trim our Fed cut expectations for the year as a whole. Should we move from three to two cuts? The market has certainly moved on, with barely more than a single cut priced at the moment. But we think it is still too early for that. For some months now, we had been describing the 2025 macro outlook as a soft landing with two-sided risks. All eyes are on inflation, but some of the recent policy announcements—some since paused or retraced, yet floating in the air in one form or another—accentuate downside risks to growth.

Specifically, cuts to federal funding for various programs could have a negative domino effect on both spending and employment, not to mention direct cuts to federal government employment. Most of the job growth recorded in 2024 was driven by a) education and healthcare, b) leisure and hospitality, and c) government. It is not just government employment (and not just federal but also state and local) that is vulnerable here, but education and healthcare, too. It would be a mistake to focus on only one end of the risk distribution. So we want to see more payrolls reports before deciding to tilt more hawkish.

We also hold off on further trimming Fed expectations because we believe the policy rate remains well into restrictive territory, allowing room for further calibration lower. We are mindful that, just as the transmission of monetary policy was slow on the way up, it is also being hampered on the way down (Figure 1). For anyone needing to refinance debt (whether companies or consumers), that refinancing is almost guaranteed to involve higher interest costs. This is most visible in the mortgage market, but holds true elsewhere. Finally, tariffs may speak to higher inflation temporarily, but they do not speak to a higher neutral rate. In that debate, the apparent increase in term premium has more relevance insofar as a sustained increase in risk or term premium should actually lower the neutral Fed Funds level, all things equal. For more of our recent analysis on US macro data and Fed views, see here.

What Does the Market Think?

Large moves in the yield curve, both immediately post-U.S. elections but also since the start of the year, reflect the market’s own unanswered questions around these issues (Figure 2). From mid-September through the end of the year, US Treasury 10-year yields surged 100 bps. They increased further in 2025, almost touching 4.8%. However, they’ve swung in a fairly wide range of 36 basis points in recent weeks. The bond market seems to agree that it is too early to tell what the ultimate impact of tariffs and immigration policies will be.

That said, remember that the Fed controls the front end of the curve, but the market owns the long end, weighing inflation, growth, productivity and labor data. Again, the transition mechanism can be slow, but there hasn’t been considerable evidence of material changes in this important macro trend data. Moreover, recent comments from Treasury Secretary Bessent, who said that the administration’s focus is on “lowering the 10 year yield” and not prognosticating on the direction of short rates, has helped to allay some concern around possible intensions to influence Fed decisions.

By contrast, global equity markets have digested the onslaught of executive orders with relative ease, at least so far, with the S&P 500 delivering +4.0% in positive performance YTD,¹ Equity market resiliency, domestically as well as abroad, and tight credit spreads, suggest that investors, at least for now, have not become overly reactionary to the suddenness of policy decisions, and their subsequent retracements. Despite the unknowns, and the prospects supporting fewer rate cuts, we should expect the vacillation within rates to continue, presenting opportunities for long term investors. We maintain a constructive view on duration, where bond holders are getting paid to take on that risk, and where any deterioration in the macro data will ding growth assets, resulting in a bid to bonds.

The Bottom Line

It is probably fair to say that in both the bond and equity markets, the initial interpretation of the election outcome focused on upside risks (higher growth, more inflation, higher yields), which resulted in a clear preference for US assets. More recently, given the somewhat chaotic manner in which policy changes have been handled so far, both markets are starting to pay some attention to downside risks (not just inflation, but also the growth impacts of tariffs, funding changes, and other government actions). With other factors such as increased global competition in the AI space, the waning sentiment for US assets is turning into a more nuanced choice.