In its December 2024 policy review, the US Federal Reserve substantially revised its inflation projections for calendar year 2025. The Personal Consumption Expenditure (PCE) inflation forecast was raised by 40 basis points (bps) to 2.5%, reflecting the recent elevated inflationary pressures and the anticipated effects of Donald Trump’s proposed tariff policies. Furthermore, the Federal Reserve’s updated dot plot signaled fewer rate cuts in 2025, reducing expectations from three cuts to two. The median projection for the Federal Funds Rate for CY25 now stands at 3.9%, reflecting an upward revision of 40 bps.
The implications for India could include a delay in interest rate cuts. This is due to the lowest interest rate spread over the US in recent history and the inflationary risks posed by Trump’s tariff policies. Even with an expected moderation in food prices, overall inflation in India may remain elevated, supported by a resurgence in growth in H2 FY25. The latter could be driven by the tapering of election-related uncertainties, weather-related disruptions, and the positive impact of a 50-bps CRR cut by the Reserve Bank of India (RBI). A strong flash Purchasing Managers’ Index (PMI) reading for December 2024 at 60.7 suggests that the growth recovery in H2 FY25 has already begun.
US Fed Maintains Optimistic Growth Outlook Amid Rising Risks
Despite the evolving challenges, the Federal Reserve remains optimistic about the US growth trajectory, reflected in an upward revision of the GDP growth forecast for CY25 by 10 bps to 2.1%. However, the Fed’s policy statement was notably silent on critical risks posed by rising twin deficits.
- Current Account Deficit (CAD): The CAD surged to 4.2% of GDP in Q3 2024.
- Fiscal Deficit: The fiscal deficit climbed to $1.8 trillion (6.4% of GDP) in 2024.
Additionally, while the labor market continues to exhibit a gradual cooling, with the unemployment rate edging up to 4.2%, these structural imbalances pose longer-term concerns.
Key Risks to the US Economy
Several risks threaten the US economic outlook in 2025, including:
- Rising Twin Deficits:
- The widening CAD (4.2% of GDP) and fiscal deficit (6.4% of GDP) are compounding inflationary pressures and reducing fiscal maneuverability.
- Inflation and Policy Uncertainty:
- Revised inflation projections and the potential inflationary impact of Trump’s tariff and mass deportation policies add to macroeconomic risks. The effects of these policies on growth and the labor market remain uncertain.
- Federal Budget Cuts:
- Recommendations from the D.O.G.E. committee to reduce federal spending could adversely impact GDP growth and federal employment prospects in 2025.
- Narrow Growth Margin:
- While the US economy benefits from a slowing yet stable growth outlook, the risks of policy missteps are rising, leaving “very little margin for error.”
These factors collectively underscore the precarious balancing act for US policymakers, with potential spillover effects for global economies, including India. The interplay between growth, inflation, and fiscal dynamics will be critical to watch in the year ahead.
Key points from the press conference:
– Future decisions will be made on a meeting-by-meeting basis, relying on incoming data.
– The initial 50bps cut reflects confidence that inflation is trending toward 2%, though this does not suggest similarly aggressive rate actions will continue.
– The labour market will be closely monitored, as the current cut aims to maintain its strength.
– No recession indicators are evident at this time.
Changes in economic forecasts compared to June’s projections:
– GDP: Growth for 2024 was lowered to 2.1% (-10bps), with 2025 and 2026 growth unchanged at 2%, and 2027 growth projected at 2%.
– Unemployment rate: Revised higher to 4.4% (+40bps) in 2024, 4.4% (+20bps) in 2025, and 4.3% (+20bps) in 2026. The 2027 rate is projected at 4.2%.
– PCE inflation: Lowered to 2.3% (-30bps) for 2024, 2.1% (-20bps) for 2025, with the 2026 forecast unchanged at 2% and 2027 also at 2%.
– Core PCE inflation: Reduced to 2.6% (-20bps) for 2024, 2.2% (-10bps) for 2025, remaining at 2% for 2026 and 2027.
– Federal funds rate: Expected to decline to 4.4% (-70bps) in 2024, 3.4% (-70bps) in 2025, and 2.9% in both 2026 (-20bps) and 2027.
Need personalized guidance? Contact our team of experts today to chart a path toward financial resilience and growth or reach us at ma*******@gr**********.com.
Disclaimer: Growthfiniti Wealth Pvt Ltd is an AMFI Registered Distributor (ARN168766). Investments in all securities is subject to market risk, please read all offer documents carefully. CRN: U65990MH2019PTC334051
