By Nicole Goodkind

Friday's parade of economic data paints a newly troubling picture of the U.S. economy.

Gross domestic product grew just 0.7% in last year's fourth quarter, half the original estimate, the U.S. Bureau of Economic Analysis reported on Friday. Inflation shows no sign of cooling, as measured by the January personal consumption expenditures price index, released the same day. The labor market has softened, shedding 92,000 payroll jobs in February, and the war with Iran has pushed oil prices above $100 a barrel.

While a recession isn't imminent, the economy now appears weaker than it did just a month ago, and there is no clear fix in sight. Federal Reserve policymakers, who meet again on March 17-18, may feel more constrained to lower interest rates in the face of rising prices, while consumers may reduce their spending as gas prices bite and the stock market falls. Small wonder talk of stagflation is circulating again on Wall Street, recalling that toxic combination of stalled growth and persistent inflation that marked the 1970s.

The initial estimate of fourth-quarter GDP growth -- 1.4% -- was itself a disappointment, given that economists had forecast growth of 2.8%. Much of the shortfall was tied to sluggish consumer spending. January's spending data told a mournful story: Americans are spending more on healthcare and housing, and pulling back on clothing, cars, and just about everything else. Real spending, adjusted for inflation, rose just 0.1% in the month.

Inflation data brought more frustrating news. The Fed's preferred gauge, the core PCE, rose 3.1% in January on an annual basis, its highest reading in nearly two years. Inflation in services, the largest part of the economy, came in at 3.5%. Neither reading affords the Fed much room to cut interest rates -- and neither yet reflects the impact of higher oil prices stemming from the war that began on Feb. 28. That will probably show up in the March data.

The war with Iran also makes everything harder to model, as higher oil price affect gasoline prices, utility bills, airfares, shipping costs, and eventually the price of nearly everything. The Fed can't help much to alleviate a supply-side shock. It can't supply more oil or reopen the Strait of Hormuz.

If policymakers cut interest rates to support a slowing economy, they risk igniting further inflation. If they hold rates steady, they risk leaving a weakening economy without support. In this unenviable position, the Fed may have to choose the least-bad option.

The central bank's dovish officials argue that with the labor market weakening and tariff-driven price pressures likely to fade, the Fed should resume cutting rates before the economy slows too much. The larger, more hawkish camp believes that inflation has proved too stubborn to risk easing again too soon, and that the oil shock only strengthens their case.

The disagreement reflects a deeper uncertainty about which threat is more dangerous right now: an economy that slows too much, or an inflation problem that lingers. The last time the Fed declared price pressures "transitory," back in 2021, it was the wrong call, and policymakers spent years paying for mistake. Nobody inside the building wants to repeat it.

Markets have mostly discounted rate cuts in the near term. Traders now see a roughly one-in-three chance that the federal-funds rate target range, currently 3.50% to 3.75%, won't change at all this year.

EY-Parthenon Chief Economist Gregory Daco projects just one rate cut in 2026, likely in December, but says it's possible the Fed won't act at all. "Fed officials are likely to resume easing only for clear 'good' reasons -- more rapid progress toward the 2% inflation target -- or clear 'bad' reasons -- a meaningful deterioration in labor market conditions," he wrote.

Daco expects to see neither in the first half of the year.

Still, there will be much to follow at the coming week's Federal Open Market Committee meeting. That includes any softening in the Fed's language around future rate cuts, a signal that even the modest easing Wall Street had been counting on later this year is now in doubt.

For consumers, none of this is abstract. If interest rates remain unchanged this year, mortgage rates probably won't fall, and credit-card and auto-loan rates will stay high. The squeeze is already visible in the spending data.

President Donald Trump took to social media this past week to demand that Fed Chair Jerome Powell cut rates "IMMEDIATELY." That isn't going to happen. But the political pressure will add another layer of complexity to an already delicate situation, particularly as Powell prepares to hand the keys at the Fed to Kevin Warsh, whom Trump has nominated for Fed chair when Powell's term ends in May. Warsh has signaled support for moving faster to cut rates.

The economy isn't yet in trouble, but the margin for error is shrinking, the latest data suggest. Much will depend on oil prices, but less, for a change, will depend on the Fed.

Write to Nicole Goodkind at nicole.goodkind@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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March 18, 2026 08:42 ET (12:42 GMT)

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