Westpac says US resilience limits scope for further Fed easing.

Summary:

• US growth remains resilient, with activity tracking above trend despite uncertainty.
• Labour market stable, unemployment steady around 4.3% and wage growth firm.
• Household balance sheets strong, wealth at record highs supporting consumption.
• Inflation risks persist, particularly in core services, complicating Fed easing.
• Westpac delays final rate cut call to June 2026, but sees risk the Fed stays on hold.

Westpac argues the US economy continues to display notable resilience, with little evidence that growth is meaningfully slowing despite elevated uncertainty and political disruption.

The bank notes that activity remained firm through the turn of the year, with the Atlanta Fed’s GDPNow tracker indicating output growth stayed above trend even during the longest federal government shutdown on record. After five years of sustained outperformance, Westpac expects growth to moderate toward trend in 2026, but sees little risk of a sustained downturn in momentum.

Labour market conditions, in its assessment, have stabilised rather than deteriorated. Nonfarm payroll growth, while softer through mid-2025, has averaged roughly 73,000 jobs per month since October. The unemployment rate has remained contained in a narrow 4.2%–4.4% range for nearly a year. Broader indicators, including wage measures and the Employment Cost Index, continue to signal firm nominal income growth, while recent improvements in ISM employment components suggest hiring intentions have steadied.

Household balance sheets are described as robust. Wealth has reached record levels, supported by gains in equities and property markets. Many households locked in historically low borrowing costs during the pandemic, while marginal borrowers are now seeing adjustable rates ease modestly. This combination, Westpac argues, leaves consumers well positioned to sustain renovation activity, housing demand and discretionary spending into 2026.

Sentiment remains the principal vulnerability. Consumer confidence measures sit well below historical averages, reflecting lingering concerns over inflation’s impact on real incomes. Businesses, meanwhile, face two-sided risks: potential supply constraints from tariffs and labour shortages, alongside uncertainty over consumers’ pricing tolerance.

Against this backdrop, Westpac cautions that persistent above-trend consumption and capacity constraints may complicate the Federal Reserve’s task of returning inflation to its 2% target. Core services inflation remains elevated. The bank has therefore delayed its expectation for the final rate cut of this cycle to June 2026, though it acknowledges low conviction and sees a greater probability that the Federal Open Market Committee remains on hold if growth and inflation outperform.