As we approach the Federal Reserve’s upcoming two-day meeting, speculation grows regarding another quarter-point reduction in interest rates. This potential move reflects a broader analysis of the current economic landscape, which has defied many pessimistic forecasts from economists. David Zervos, the Chief Market Strategist at Jefferies LLC, recently highlighted this disconnect during a discussion at CNBC’s Financial Advisor Summit, pointing out that forecasters had predicted a recession two years ago which has not materialized. Instead, the economy continues to experience growth while inflation rates have stabilized.
The latest figures indicate that the Federal Reserve’s preferred gauge of inflation is currently at 2.3%, while the rate excluding volatile food and energy prices rests at 2.8%. Other encouraging signs can be found in the anticipated annualized growth rate of 3.3% for the fourth quarter as noted by the Atlanta Fed. Such metrics present a more favorable economic environment than many predicted, inviting discussions about the impacts of various policies. Zervos argued that excessive attention on inflation stemming from trade or immigration could lead to misunderstandings about the broader economic conditions.
In light of the positive economic indicators, Fed Chair Jerome Powell recently expressed optimism about the U.S. economy’s resilience. This robust performance provides a more flexible framework for the Fed as it revises its monetary policies. Barbara Doran, CEO of BD8 Capital Partners, echoed these sentiments, confidently asserting that economic growth will remain strong into the following year. With predictions leaning towards a sustained positive trajectory heading into 2025, analysts are urging a more measured approach rather than a frantic reaction to transient inflationary pressures.
Yet, the potential for economic disruption looms with President-elect Donald Trump’s impending fiscal strategies. Zervos highlighted the anticipated deregulation, which he considers a significant disinflationary factor. Reflecting on the previous Trump administration, he noted the lack of inflationary spikes — a trend that might repeat itself if similar policies are reinstated. Nevertheless, there’s an underlying tension regarding Trump’s proposed tariffs, which could counteract these disinflationary benefits by driving consumer prices higher.
Goldman’s Chief Economist, Jan Hatzius, projected that proposed tariffs could elevate consumer prices by nearly 1%. This potential rise raises questions about the economic burden on the lowest-income households, who are likely to feel the pressure most acutely in a climate of rising costs. Should inflation begin to gain traction, it could pose challenges for the Fed’s strategy, potentially delaying further rate cuts. Analysts largely expect a more cautious pace of adjustments in the Federal Reserve’s actions throughout 2025 as they continue to evaluate the duality of economic growth against the risks associated with inflation. As the landscape unfolds, careful monitoring will be required to navigate the delicate balance between growth and inflation.