Economic Resilience Meets “Higher for Longer” Rates

As we kick off 2025, the economic landscape showcased a strong economy and resilient job market even as higher interest rates weigh on market sentiment. This week’s data underscore the delicate interplay between inflation expectations, real growth, and the Federal Reserve’s policy stance.

Let’s start with the headline data. Jobless claims fell to the lower end of the 200,000–240,000 range, signaling a robust labor market. The jobs report came in considerably above expectations, but wage growth was actually below expectations. Yet, inflation expectations in consumer surveys spiked, I believe a reflection of concerns over new tariff possibilities rather than a broader inflationary trend.

Meanwhile, commodity prices, led by oil, firmed up slightly. The increased restrictions on Russian oil exports have contributed to recent gains, but broader commodity trends do not signal runaway inflation. On the monetary side, money supply growth reached a healthy 5%—its highest pace in three years—indicating growing credit but this is not inflationary.

The Federal Reserve remains at the center of market dynamics, with its December rate cut sparking some debates about the true neutral rate of interest. I’ve long argued that the neutral rate is higher—closer to 3.5% to 4%—than the Fed’s estimate of 3.0%. The strength of the economy, coupled with the optimism surrounding technology investments and resilient consumer spending, makes me think this equilibrium rate may be at the higher end of the range. The real rate on 10-year Treasury Inflation Protected Securities (TIPS) has climbed to 2.3%, near its 2023 high, which was the highest in more than a decade.