A look ahead: First quarter 2025 outlook
Looking ahead, there are good reasons to believe robust growth can continue. Interest rates are likely to fall further, and we are encouraged by rising productivity.
Our base remains that the U.S. economy is sufficiently robust and diversified to withstand political and economic uncertainty. With time and a little help from the U.S. Federal Reserve (Fed) if needed, it can adapt to even dramatic policy changes.
Inflation measures have come down but remain above the Fed’s long-term average target of 2%, and the most recent data suggests the downward trend in inflation could be stalling. Service price inflation, in particular, has been notably sticky.
The bond market’s reaction to higher inflation expectations has been to price in fewer interest rate cuts in the year ahead. While we agree there will likely be less need for lower interest rates, we also believe the Fed would like to return rates to a more “neutral” (neither stimulative nor restrictive) level estimated around 3.5%, as the data allows.
While there are many potential headwinds, we expect 2025 will confirm that the economy had a soft landing in 2024 and should see sustained and possibly accelerating growth in the year ahead. There are risks to this view, foremost of which is the lack of clarity about the incoming administration’s domestic and foreign policies.