Slower growth and sticky prices puts fresh pressure on March Fed decision
Economic growth in late 2025 came in far weaker than first thought, even as underlying inflation remained uncomfortably firm – a combination that means the Federal Reserve heads into its March 17–18 meeting facing a sharper trade‑off between cutting rates and keeping prices in check.
Gross domestic product, the broadest measure of US output, was revised down to a 0.7% annualized gain in the fourth quarter. That's from an initial 1.4% estimate and a 4.4% surge in the prior quarter.
For 2025 as a whole, GDP rose 2.1%, slower than 2024’s 2.8% pace. Economists expected growth to hold at 1.4%.
According to the Commerce Department’s Bureau of Economic Analysis, the downgrade largely reflected softer consumer and government spending, weaker exports and a smaller drag from imports than previously reported.
A 43‑day federal government shutdown also cut into federal outlays, with one estimate showing government spending and investment plunging at a double‑digit annual rate and shaving more than a full percentage point from growth.
Inflation backdrop clouds rate‑cut hopes
On prices, the Fed’s preferred gauge – the personal consumption expenditures index – increased 0.3% in January and 2.8% over 12 months, broadly in line with forecasts.
Core PCE, which strips out food and energy, rose 0.4% on the month and 3.1% year‑over‑year, edging higher than December and remaining well above the central bank’s 2% goal.
Those data predated two potentially disinflationary and inflationary shocks: a Supreme Court decision that voided many of president Donald Trump’s tariffs under the International Emergency Economic Powers Act, and early‑March US–Israeli strikes on Iran that pushed Brent crude briefly to $100 a barrel.
What it means for mortgage‑rate watchers
For mortgage professionals, the mix of weaker growth and still‑elevated core inflation echoes earlier episodes in this cycle when the Fed hesitated to pivot quickly.
In April 2025, Mortgage Bankers Association chief economist Mike Fratantoni described “the quandary facing the Federal Reserve” as slower growth colliding with renewed price pressures, adding that officials were likely to keep rates steady “until it becomes clear whether a recession or inflation is the bigger risk.”
Additionally, markets sometimes shrug off both economic data and geopolitics. Choice Mortgage Group executive Emmanuel St. Germain previously told Mortgage Professional America that he had “never seen a 10‑year Treasury that's held steady like this” despite “bombs being dropped in the Middle East,” arguing that the market had become “really desensitized.”
The 10‑year Treasury yield edged lower Friday after the sharp downgrade to fourth‑quarter GDP. The benchmark 10‑year slipped nearly 3 basis points to 4.245%, while the 30‑year eased to 4.881%.
Meanwhile, the 2‑year – the maturity most tied to expectations for Fed moves – fell 6 basis points to 3.702%.
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