Economic Strength and Inflationary Pressures: A Recipe for Rate Hikes in 2025?
The US economy is showing no signs of slowing down, with the Commerce Department revising third-quarter growth to a robust 3.1%. This upward trend, combined with the potential for lower taxes, higher tariffs, and restrictions on immigration, has increased the likelihood of the Federal Reserve resorting to rate hikes in 2025, according to Apollo Global Management chief economist Torsten Sløk.
A Strong Economy and Inflationary Pressures
Sløk estimates that there is a 40% probability that the Fed will raise interest rates in 2025, citing the economy’s strength and the potential for inflationary pressures. The Atlanta Fed’s GDPNow forecast points to another 3.1% print for fourth-quarter growth, well above the Congressional Budget Office’s view for long-term growth of 2%. Meanwhile, President-elect Donald Trump’s campaign promises of tax cuts, higher tariffs, and an immigration crackdown are expected to add to inflationary pressures.
The Fed’s Dilemma
With inflation still above the Fed’s 2% target, these policies could limit the central bank’s ability to lower rates further. Fed officials have already taken these moves into account, significantly raising inflation forecasts without similar changes to economic growth and unemployment estimates. As a result, investors are bracing themselves for a potential repeat of 2022, when high inflation, rising interest rates, and falling stock prices led to a 19% decline in the S&P 500 and a 33% tumble in the Nasdaq.
A Hawkish Fed in 2025?
Market veteran Ed Yardeni agrees that the odds of just one or even no rate cuts next year are higher. The so-called neutral rate, the level that neither speeds up nor slows down growth, remains uncertain, with analysts assessing whether the economy can now withstand tighter monetary policy than before. Yardeni Research notes that economic growth may be stronger than the Fed expects, potentially pushing the neutral rate higher than 3.0%, perhaps closer to 4.5%–5.0%. If this scenario plays out, the FOMC may be on pause for a while.
What’s Next for Investors?
As the economy continues to grow and inflationary pressures build, investors would do well to prepare for a potential rate hike in 2025. With the Fed’s next move uncertain, it’s essential to stay informed and adapt to changing market conditions. One thing is clear: the strong economy and inflationary pressures are setting the stage for a potentially volatile 2025.
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