GDP
Real GDP grew at a 2.3% annualized pace in the fourth quarter, lower than the consensus 2.6% estimates.
Our Take: A large drawdown of inventories was the primary culprit for the lower-than-expected GDP growth. The inventory decline was most probably due to businesses being unprepared for strong consumer spending as personal consumption rose 4.2%, well above 3.2% estimates. Moving forward, inventories should be replenished, which would add to GDP growth in future quarters. The Fed is likely to view this report as proof that monetary policy remains in a good place.
THE FED
As expected, the Fed decided to leave the target Fed Funds rate unchanged at 4.25%-4.50%. According to the Fed statement, economic activity continued to expand at a “solid pace,” while unemployment has “stabilized at a low level” in recent months and inflation remained “somewhat elevated.” In his post-meeting remarks, Fed Chairman Jerome Powell noted the risks to achieving the Fed’s employment and inflation goals are “roughly in balance” and the Fed is attentive to the risks on both sides of its dual mandate. Powell added that policy is well positioned and that the Fed is not in a hurry to adjust its policy stance.
Our Take: There were no surprises from the Fed this week, as the pause was highly anticipated. With a more stable labor market and inflation remaining stubbornly above target, the pace of future rate cuts remains unclear. For now, the Fed can be patient as it continues its careful, data-driven approach to policy normalization.
MUNICIPALS
New York Governor Kathy Hochul released her Fiscal Year 2026 budget proposal. The $252 billion plan is approximately $9 billion higher than the current year. Hochul’s budget calls for an income tax reduction for taxpayers earning up to $323,000 along with expanded child tax credits. Hochul has stated that maintaining the state’s reserves remains a priority.
Our Take: Governor Hochul and lawmakers have until April 1 to finalize the 2026 budget. Some lawmakers have expressed concern that the tax reduction is not large enough to make a meaningful difference for taxpayers. Nevertheless, New York finds itself in a healthy fiscal position going into the 2026 fiscal year with higher-than-expected 2025 tax revenue due in part to a strong stock market.