fxs_header_sponsor_anchor

Analysis

US economy has strong momentum, but policy uncertainty clouds the outlook

US economy has strong momentum, but policy uncertainty clouds the outlook

The American economy has entered 2025 with a strong head of steam. We estimate that real GDP grew at an annualized rate of 2.7% in the recently completed fourth quarter of 2024, and the economy ended the year on a strong note by creating 256K net new jobs in December.

Most businesses are in solid financial shape. The pace of gross hiring has downshifted in recent months, but most firms do not need or want to cut staff.

Progress on returning inflation to the Fed's target of 2% has slowed. The year-over-year change in the core PCE deflator, which most Fed officials believe is the best measure of the underlying pace of consumer price inflation, edged up from 2.6% during the summer to 2.8% in November.

The economic outlook for 2025 is clouded by the potential for changes in U.S. trade policy. Although President Trump may not necessarily impose a universal tariff on American trading partners when he takes office, the probability of higher levies in coming months is not insignificant, in our view.

Higher tariffs, should they be imposed, would impart a modest stagflationary shock to the economy. That is, inflation could potentially pick up and real GDP growth could slow. Higher prices would erode growth in real income, thereby weighing on growth in real consumer spending.

We have made some adjustments to our outlook for U.S. monetary policy due to the economy's strong head of steam recently and slow progress in returning inflation to 2%. We now think the FOMC will remain on hold for an extended period of time. We look for only two 25 bps rate cuts this year: the first in September and the second in December. Then, we think the Committee will keep its target range for the federal funds rate unchanged at 3.75%-4.00% throughout 2026.

The levying of tariffs could present the FOMC with a policy conundrum. If the Committee responds to an uptick in inflation with tighter policy, then the unemployment rate could rise. On the other hand, however, if the FOMC tries to offset the growth-slowing effects of tariffs with more accommodative monetary policy, then inflation could tick even higher.

We should learn more about the policy choices of the Trump administration in the coming weeks and months, and we will be prepared to make adjustments to our outlook, if necessary, as those details become known.

Download The Full US Economic Outlook

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.


RELATED CONTENT

Loading ...



Copyright © 2025 FOREXSTREET S.L., All rights reserved.