The Federal Reserve (FED) is currently in the worst situation

The US GDP has just decreased to 1.4%, while inflation has risen again.

US GDP is forecasted to reach 3% but only achieved 1.4%.
This is a significant negative surprise and indicates that economic growth has slowed much more than market expectations.
One main reason for this slowdown is the government shutdown in Q4, which lasted nearly 1.5 months. This directly impacted output, spending, and overall economic activity, pulling GDP lower.
But that is only one side of the story. At the same time, inflation data shows an increase.
PCE inflation reached 2.9%, the highest since March 2024.
Core PCE inflation rose to 3%, the highest since April 2024.
This is very important because PCE is the inflation measure favored by the Federal Reserve. Although the Consumer Price Index (CPI) and core CPI have recently been trending downward, the Personal Consumption Expenditures (PCE) index shows that the costs of goods and services are still rising in the economy.
Therefore, we are currently facing a difficult situation. On one hand, growth is slowing down. GDP is much weaker than expected. Economic activity is losing momentum, and the number of unemployed people is increasing.
On the other hand, the prices of goods and services are not fully under control. Prices are still rising at a rate exceeding the Federal Reserve’s target.
This puts pressure on consumers.
If growth slows while prices continue to rise, households will find it harder to manage their spending. Income growth cannot keep up with living costs, and financial stress is increasing.
Currently, the Federal Reserve is facing a clear dilemma.
If the Fed quickly cuts interest rates and injects liquidity into the system, it could help support GDP growth and improve the labor market. Lower interest rates make borrowing cheaper and can stimulate spending and investment.
However, if inflation remains high, cutting rates too early could push prices back up, worsening inflation issues.
If the Federal Reserve maintains high interest rates and continues to pause rate hikes, inflation could decrease further. But slower growth might lead to a deeper slowdown. GDP could decline further, and the labor market could deteriorate even more.
Therefore, currently, the Fed is caught between two risks:
Cutting interest rates and facing the risk of higher inflation.
Keeping rates high and risking a deeper recession.
This combination makes the next policy decision much more complex than before.