Economic Slowdown Meets Cooling Inflation, Fed Rate Cut Expectations Reignited as U.S. Stocks Rally on the News

According to Reuters, on March 13, the U.S. Department of Commerce stated that the January U.S. Personal Consumption Expenditures Price Index (PCE) was largely in line with expectations, the latest sign that inflation was relatively moderate before the outbreak of Middle East conflicts. The January PCE index rose 0.3% month-over-month, matching economists’ expectations in a Reuters survey, after a 0.4% increase in December. Excluding volatile food and energy components, the core PCE price index increased 0.4% month-over-month in January, in line with expectations.

Year-over-year, U.S. January PCE inflation rose 2.8%, below the expected 2.9% increase. The core PCE price index rose 3.1%, in line with expectations, after a revised 3% increase in December. The Federal Reserve tracks the PCE price index to achieve its 2% inflation target.

Following the release, market expectations for Federal Reserve rate cuts increased, with traders betting on rate cuts before September.

Meanwhile, the U.S. Department of Commerce indicated that U.S. GDP grew 0.7% in the fourth quarter of 2025, below the 1.4% growth expected by economists in a Reuters survey.

In market reactions, U.S. stocks rose after the data release, with futures for the Dow Jones Industrial Average (DJI), S&P 500 (SPX), and Nasdaq Composite (IXIC) all up 0.4%. U.S. Treasury yields declined, with the 10-year yield down 2 basis points to 4.25%. The two-year yield, which is sensitive to Fed policy expectations, fell 6 basis points to 3.70%. The U.S. dollar index rose 0.3% to 100.32.

Sparta Capital Securities Chief Market Economist Peter Cardillo said, “We have a series of mixed macroeconomic news. Of course, the downward revision of GDP was much larger than expected, which is not good news, and consumer spending was also revised downward. The good news is that inflation measured by the PCE is largely in line with expectations. Inflation remains high and sticky, and as energy prices eventually enter the pricing chain, the Fed may remain on hold longer.”

Tim Grisky, Senior Investment Strategist at Ingalls & Snyder, pointed out, “Most of today’s economic data generally met expectations, except for weak durable goods orders and a weak GDP forecast. These data have raised some concerns about the economy. They are worth paying attention to, as they challenge the strength of the U.S. economy. The ongoing Middle East conflict is currently the most important factor influencing financial markets.”