A surprise contraction in the U.S. economy during the first quarter of 2025 has led to a slight revision in market expectations regarding potential interest rate cuts by the Federal Reserve.
According to new data from the U.S. Bureau of Economic Analysis, the economy shrank by 0.3% year-over-year, raising fresh questions about the central bank’s path forward on monetary policy.
Trade Tensions and Import Surge Weigh on Growth
Part of the contraction was attributed to a sharp rise in import activity by U.S. companies, as firms rushed to stock up on goods ahead of anticipated tariff hikes. This front-loaded demand impacted GDP growth during the quarter.
Markets Still Expect Fed to Begin Cutting Rates in June
Despite the contraction, futures markets tied to the Fed’s benchmark rate still indicate that the central bank is likely to begin cutting interest rates in June.
Current projections suggest that the Fed could implement four quarter-point cuts in the second half of the year. If that trajectory holds, the federal funds rate would fall to a range between 3.25% and 3.5% by year-end 2025.
A Balancing Act for the Fed Amid Economic Uncertainty
These shifting expectations underscore ongoing uncertainty surrounding the U.S. economic outlook, especially as the country navigates slowing growth and ongoing trade tensions.
The Federal Reserve now faces a delicate balancing act: trying to stimulate growth without re-igniting inflation, all while steering through one of the most complex global economic landscapes in recent years.
