US Growth Stays Strong as Fed Weighs Next MoveUSGrowthStaysStrongasFedWeighsNextMove

The US economy grew at a stronger pace than expected in the fourth quarter, demonstrating that cooling inflation and a resilient labor market buoyed consumers in the face of higher borrowing costs. The economy registered 3.3% growth on an annualized basis, below the third quarter’s 4.9% pace but better than forecasts for a 2% advance. That left the US with 3.1% growth for the full year, as the economy shook off fears of a recession. Market participants have grown hopeful that slower growth and weaker price pressures in the months ahead will put the Federal Reserve on a dovish course. Stubborn consumer inflation and robust hiring in December, alongside public remarks from policymakers who suggested that central bankers will proceed cautiously as they consider lowering rates, helped curtail market optimism for an aggressive rate-cut campaign this year.

Meanwhile, with less than one week before the Fed’s next meeting, investors will get a fresh look at the state of inflation with the latest personal consumption expenditures (PCE) data on Friday. Economists have forecast that underlying inflation continued moving closer to the Fed’s target in December. Estimates suggest the core PCE price index was up 3% year-over-year, compared with 3.2% in November. The GDP report on Thursday showed that core PCE inflation rose 2% annualized in the fourth quarter. The US economy’s resilience against higher rates has investors hoping the good cheer continues, but every year brings a new set of challenges for financial markets. PGIM’s annual Best Ideas shine a light on the areas where we believe investors will find promising opportunities.