With no new tariff announcements, trade tensions were temporarily moved to the backburner this week, allowing investors to shift the focus to the economic data calendar. February data readings out this week were mixed. Retail sales underwhelmed expectations, but both housing starts, and existing home sales largely recovered from January’s weather induced slide. Meanwhile, the Federal Reserve held the policy rate steady at a target range of 4.25%-4.5% but signaled an intention to slow the pace of balance sheet runoff for U.S. Treasury holdings starting in April. While investors were braced for a more downbeat messaging on the outlook, the Fed’s statement and Chair Powell’s press conference struck a more balanced tone. This helped to temporarily soothe unnerved financial markets, but growth fears reemerged by late-week, fueling a further sell-off. At time of writing, the S&P 500 was down 0.5%, while term yields traded lower by about 10bps, with the 10-year Treasury currently sitting at 4.22%. 

The Fed’s statement included updated economic projections from FOMC members. The median GDP forecast was revised lower over the forecast, with a below-trend pace of economic growth expected in 2025 (1.7% from 2.1%), before steadying at 1.8% in 2026 (previously 2.0%) and 2027 (previously 1.9%). The unemployment rate was nudged higher by a tick this year to 4.4% but remained unchanged at 4.3% in 2026 and 2027. Core PCE inflation was also revised higher for 2025 (2.8% from 2.5%), which Chair Powell largely attributed to tariff impacts. Importantly, the revised “dot plot” still showed two 25bps rate cuts for this year. But a closer inspection of the dots shows that committee members see the balance of risks skewed towards fewer cuts, as eight officials now expect one or no cuts this year (up from four in December) (Chart 1).

During the press conference, Chair Powell characterized the economy as “strong”, but emphasized that any point forecasts remain “highly uncertain” in light of recent policy changes under the new administration. When asked about the recent pullback in business and consumer sentiment measures, Powell reiterated that the “hard data” are still showing an economy that is “solid”. He also downplayed the recent jump in inflation expectations shown in the University of Michigan survey, characterizing it as an outlier relative to most other measures.

But this week’s retail sales data suggests otherwise. Retail sales rose by just 0.2% m/m in February, after declining 1.2% in January. Only 5 of the 13 major categories (Chart 2) saw gains last month while revisions to January showed an even weaker pace of retail spending than previously reported. Moreover, spending at bars & restaurants – the only services-based metric included in the retail report – plunged by 1.5% or the largest monthly pullback in two-years. This bears close watching, as discretionary services spending has been a key driver underpinning the strength of the consumer in past years. 

For now, the Fed appears comfortable to sit tight and wait for more clarity on both the policy and data front. This will not come from any one policy announcement or data reading, suggesting policymakers will remain on the sidelines for at least another few months before making their next move.