The Fed Shifts Gears Into 2025

The last Fed Open Market Committee meeting of the year was on Wednesday. The Fed lowered interest rates another 0.25%. This marks a total of 1% in interest rate cuts over the past three meetings. This brings the Fed Funds rate to a range of 4.25% to 4.50%.

The Fed signaled they expect to pause interest rate cuts at the next meeting in January. The median projection shows a 0.50% cut in interest rates throughout 2025.

Prices remain high relative to the past few years and are a major source of economic pain. Treasury Secretary nominee Scott Bessent said, “In many ways, inflation is worse than a recession.”

Inflation fell from its peak in 2022 but is still above the Fed’s goal of 2%. After higher data in the first quarter of this year, the data is trending in the right direction. Still, the median Fed forecaster sees core prices above the target in 2025 at 2.5%.

One major area holding up prices is housing and rent. The calculation of these metrics has them lagging real-time measures like Zillow or Apartment List would show.

The Fed’s focus has turned to the labor market, which shows signs of slowing. Most of the gains in payrolls have come in healthcare and government jobs. Healthcare is in a secular growth trend as our population ages. Local and state government jobs have grown compared to the federal level. State and local government spending looks set to fall in 2025, so this source of jobs gains will be less.

Over the past three months, private payrolls increased by 78,000. We need to see this data increase for the economic expansion to continue. The key sectors we are watching are those that tend to see losses in economic downturns: construction and manufacturing.

For now, the economic momentum remains solid. Corporations continue to invest. Households have strong balance sheets. Retail sales have been strong. The Atlanta Fed’s GDP projection for the fourth quarter is up 3%.

The potential policy changes in 2025 bring a degree of uncertainty. We know personal tax cuts will likely be extended. There is a potential reduction in the corporate tax rate. Both would be expansionary. On the other hand, tariffs and immigration policies may bring a contraction in economic activity in the short run. We continue to closely monitor the likely path ahead as we gain more clarity.

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