
US economics, inflation, and the Fed
The Federal Reserve can postpone cutting the benchmark short-term interest rate through midyear. That is because the rate of inflation, as reflected by the pace of December consumer and producer price increases, was still running above the Fed’s target growth rate of 2.0%. This, along with a still-healthy labor market, now has the Fed projecting a shallower rate-cut path this year. The federal funds rate is to remain at 4.25% to 4.50% according to Value Line’s assessment.
Pausing on the interest-rate front also gives the Fed more time to assess the impact of the new Administration in Washington, D.C. on the performance of the U.S. economy. President Trump has promised an economic agenda focused on lower taxes, fewer regulations, and the increased use of international tariffs, the latter of which could lead to a reacceleration in inflation. That said, the likely resultant increase in energy production later this year may well decrease inflation by lowering energy prices, which are a significant factor in production costs across a variety of industries.
Treasury yields remain on an upward trajectory, and it had little to do with the Fed, which cannot control yields of long-duration bonds. In fact, the yield on the 10-year Treasury note recently was a full percentage point above where it was on September 17th, the last day before the central bank began cutting interest rates. This move higher has been driven by several factors, including increased confidence in the economic outlook, heightened worries about the fiscal policy outlook, further reassessment of the Federal Reserve’s likely rate-cut path, and raised concerns about the direction of inflation.
With fixed-income yields likely to remain elevated in 2025, profit growth from Corporate America will be needed to justify the equity market’s historically elevated valuations. On point, the fourth-quarter reporting season got off to a favorable start with many of the prominent financial services companies and money-center banks easily surpassing expectations.
Global economy
A flurry of executive orders and announcements followed the US inauguration but did little to reduce policy uncertainty. The tension between fiscal and regulatory actions that reduce burdens on US firms against shifts in immigration and trade policy that generate a negative global supply shock remains high. JP Morgan’s view is still that realized policies will maintain a balance between these objectives and avoid extremes, with the bank’s forecast tilting towards modestly weaker global growth, higher inflation and a relative shift in global business sentiment favoring the US.
While it is encouraging that new tariffs were not announced immediately, President Trump’s reiteration of his intention to impose 25% tariffs on imports from Canada and Mexico challenges the view that “balanced” policy changes are in the offing. Tariffs of this magnitude on countries accounting for nearly 30% of US trade would represent a large trade shock. Their direct effect on growth and inflation would be substantial across North America, particularly after incorporating likely retaliatory action. But the damage from a North American trade war would likely be magnified by its disruptive effects on supply chains and its depressing impact on business sentiment as the US effectively dismantles a multi-decade free trade agreement. JP Morgan holds to its baseline view that the US employs the threat of USMCA (USA, Mexico, Canada) tariffs to leverage its position in border security and trade negotiations.
Elevated concern around US trade policy can by itself be a drag on global growth as it was in 2018-19. But JP Morgan’s forecast incorporates two offsets to the increased risk of rising tariffs. First, there should be a lift in global industry as we turn into the new year in response to last quarter’s strong consumer goods spending gain and a front-loading of trade flows in response to tariff fears. Second, they look for a unique boost to US sentiment in response to sustained strong domestic demand and the prospect of regulatory and tax policy relief. Incoming news supports these views, which incorporate a pickup in factory output growth to 3% per year as we start 2025 and sustained global GDP growth at 2.5% per year.
Stock market
It is very rare to have 20% + stock market returns back-to-back as it just happened for us in 2023 and 2024. On average, the stock market returned 10% annually over the last 100 years (see BlackRock Student of the Market January 2025 edition illustration below).

While it is hard to expect the market to keep up that growth rate, we should be overall encouraged by the fact that the current expansion is fairly young by recent historic norms, and we could see more of the late expansion phase over many more months if not years (see BlackRock Student of the Market January 2025 edition illustration below).

The information and opinions included in this document are for background purposes only, are not intended to be full or complete, and should not be viewed as an indication of future results. The information sources used in this letter are: WSJ.com, Jeremy Siegel, Ph.D. (Jeremysiegel.com), Goldman Sachs, J.P. Morgan, Empirical Research Partners, Value Line, BlackRock, Ned Davis Research, First Trust, Citi research, HSBC, and Nuveen.
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