The United States economy further defies expectations, again growing according to forecast but with the usual headwind of new and raised tariffs weighing on the economy. Recent analyses like these demonstrate the unpredictable way the economy has only slightly undercut predictions. As they chill business activity, we anticipate the biggest adverse effects from tariffs on economic growth will be felt in the third and fourth quarter of this year.
Even the most optimistic economic experts only see a return to sequential growth beginning in 2026. The next move by the Federal Reserve is widely anticipated to be a rate reduction—by 25 basis points—in September 2023. This change comes alongside the US recovery getting underway. These cuts will continue quarterly until the Fed reaches a target terminal rate between 3.00% and 3.25%, anticipated by September 2026.
Tariff levels are up a bit more than we’ve anticipated since early summer based on recent estimates. This increase is exacerbating burdens already placed on a number of industries. The effect of these increased tariffs says one thing but that is somewhat offset by the additional stimulative effects of the new ‘Big Beautiful Bill’. On top of this, we are experiencing a major loosening in financial conditions. These supply-side factors combine to provide a material offset to downside risks to national economic growth.
Looking further out on GDP growth projections, the forecast for 2025 is still 1.6%. For 2026, GDP growth is revised up a notch to 1.4% from an estimate of 1.3%. Even with the unpredictable nature created by tariffs, these outlooks are indicative of an underlying placidity in the movement of our economy.
Projections for inflation in future years are just as calm. The headline inflation projection for 2025 is still 2.8% and for 2026, it’s 2.6%. Core inflation continues to be quite high and non-stop. The outyear projections are for 3.0% in 2025 and 2.8% in 2026, with no offsets assumed.
Yet, despite these positive signs, economists are warning that two-sided risks are growing around the policy rate outlook. This uncertainty—which is ultimately unacceptable—stems from a combination of domestic and international influences. Collectively, these forces threaten to undermine our economic strength and prosperity in the years to come.
As policymakers navigate these complexities, attention will remain focused on the Federal Reserve’s actions and their implications for economic health. If implemented, these expected rate cuts would signal an adaptive approach, one focused on nurturing growth despite a wider world bringing continued pressures.