The Economy Grew More Slowly Than Expected, But Inflation Is Still Stubbornly High

Two important pieces of economic data came out on Friday, February 20th, and together they painted a complicated picture of where the US economy stands right now.

First: GDP growth disappointed

The US economy grew at a 1.4% annualized rate in Q4 2025. That sounds okay, but economists were expecting 2.5% growth. The sharp slowdown from Q3's 4.4% rate was eye-catching.

The main culprit? The federal government shutdown that lasted from October to November 2025. The Bureau of Economic Analysis estimates the shutdown subtracted about 1 percentage point from growth. So without that, growth might have been closer to 2.4%, which is still decent. Exports also fell, dragging down the headline number.

The good news: consumer spending and business investment were reasonably solid. "Private final demand," basically how much regular people and businesses were spending, grew at 2.4%, which is close to the long-run trend. The economy doesn’t seem to be falling apart; it had a bad quarter partly due to the shutdown.

Second: inflation is still above the Fed's target

The Federal Reserve's preferred inflation gauge — called PCE (Personal Consumption Expenditures) — came in at 2.9% year-over-year in December, up from 2.8% in November. The "core" version, which strips out food and energy prices, rose to 3.0%, which is still higher than the Fed's 2% target.

Month over month, prices rose 0.4% in December, faster than the 0.3% pace economists expected. Both goods and services prices are rising, suggesting inflation is broad-based rather than being caused by one or two unusual items.

What does this mean for interest rates?

This is where it gets interesting for anyone with a mortgage, credit card debt, or savings account. The Federal Reserve controls something called the "federal funds rate." The fed funds rate is basically the interest rate banks charge each other for short-term loans. This rate filters through to affect mortgages, car loans, credit cards, and savings rates.

The Fed has been holding rates at 3.50%–3.75% since its January meeting, having cut three times in late 2025. With inflation still running above target, the Fed has little reason to lower rates again soon. Markets now put only about a 57% probability on a rate cut before June. That’s down significantly from 85% just a week ago.

The uncomfortable scenario economists are watching: what if growth keeps slowing while inflation stays high? That’s really the worst of both worlds for the Fed, which can only really fight one problem at a time.

Sources: BEA, CNBC, Charles Schwab