Economists at Paidenreiger Asset Management predict significant changes in the U.S. economy by the end of 2025, including a potential rise in unemployment and a sharper-than-expected cut in interest rates by the Fed.
In the latest economic outlook report, economists predict that core inflation, a key measure closely watched by the Fed, could fall below its 2% target at some point in 2025. But this improvement in inflation is expected to coincide with an increase in the unemployment rate, which is projected to rise to 4.4% or higher by the end of 2025.
With inflation falling and unemployment rising, the Fed could respond with aggressive rate cuts that exceed current market expectations. The report suggests the Fed could cut interest rates by more than the 35 basis points currently expected by U.S. money markets. The optimal federal funds rate could be as low as 3.3%, Paidenreiger’s analysis suggests, which would require at least four rate cuts in 2025.
The Fed has already begun cutting interest rates, cutting its benchmark interest rate by a full percentage point in each of its three meetings since September. But central bankers have signaled a slower pace of cuts going forward. According to the Fed’s latest economic projections, policymakers expect to cut interest rates by just three-quarters of a percentage point through 2024.
The forecasts underscore the delicate balancing act the Fed faces as it navigates a cooling economy. While getting inflation under control remains a priority, rising unemployment poses a challenge for policymakers aiming to maintain economic stability.
*This is not investment advice.
