US economic growth drastically slowed and the Fed’s preferred inflation gauge heated up at the end of 2025 – complicating the path to more interest rate cuts, economic reports indicated Friday.
Gross domestic product, or GDP – which measures spending on goods and services – rose at an annualized rate of just 1.4% in the fourth quarter of 2025, well below expectations of around 2.5%, according to the Commerce Department.
For the full year of 2025, the US economy grew at a 2.2% pace. That’s down from a 2.8% clip in 2024.
Meanwhile, the Fed’s preferred inflation gauge – known as the PCE price index – heated up to 2.9% in December, above estimates of 2.7%, the Bureau of Economic Analysis said.
The core PCE, which excludes volatile food and energy prices, rose 3% over the past year. While it matched expectations, the figure is still considerably higher than the Fed’s 2% inflation target – and indicates progress on reducing inflation has stalled.
“Unfortunately, this report will prolong the disagreement between hawks and doves on the Federal Reserve,” Chris Zaccarelli, chief investment officer for Northlight Asset Management, said in a note Friday.
Minutes from the Fed’s January meeting that were released Wednesday also revealed policymakers are more reluctant to cut rates this year.
Less than an hour before the disappointing GDP report was released, President Trump wrote in a post on Truth Social that last year’s record-breaking government shutdown was to blame for the dramatic slowdown in growth.
“The Democrat Shutdown cost the USA at least two points in GDP,” he stated. “Also, LOWER INTEREST RATES. ‘Two Late’ Powell is the WORST!!!”
His jab at Federal Reserve Chair Jerome Powell – whose term at the head of the central bank ends in May – comes as analysts expect the recent economic reports to keep policymakers on a wait-and-see approach moving forward.
The Commerce Department said the dismal GDP reading – which was a sharp decline from the 4.4% rate in the third quarter – was partially influenced by the government shutdown, but that it was also slammed by weaker consumer spending and exports.
“At first glance the first reading of Q4 GDP was very disappointing,” Zacarrelli wrote.
“However, the government was shut down for almost half the quarter. Some estimates have put the number closer to 2.4% if the government hadn’t been shut down, but it’s always hard to know how accurate those adjustments are.”
The PCE report also solidified the case for Fed officials to hold off on more rate cuts, as good prices climbed 0.4% and services rose 0.3% – implying that price pressures are still taking place across the board, not in any one sector.
“Even though this data is now a few months old, it shows that the Federal Reserve’s inflation problem is far from solved,” Rick Gardner, chief investment officer at RGA Investments, said in a note Friday.
Government spending and investment plunged 5.1% – largely drawn down by a 16.6% decline in federal spending as the government was shut down.
But there were some underlying signs of economic strength.
Final sales to private domestic purchasers rose 2.4% and gross private domestic investment jumped 3.8%.
