SFC Outlook 2025 | Moody's Analytics Mark Zandi: Investors Should be Cautious and Patient

I think tariffs are a bad idea, you know, particularly if they're broad-based across lots of different countries and products. It's what economists call a negative supply shock. It raises prices, causes inflation, undermines consumer purchasing power, and thus slows growth. So it both slows growth and raises inflation, complicates things for the Federal Reserve. So I think that's a policy that will be very difficult for the US economy and for the global economy.

I think the Fed will be on hold. You know, the Fed, as you know, has been cutting interest rates since last September and cut rates almost a little over a percentage point during that time. But they indicated at their last meeting a few weeks ago that they are going to go on hold, that they're going to wait and see exactly what President Trump has in mind with the tariff policy and his immigration policy. And once the dust settles and they get some clarity, they might start cutting rates again. But that probably won't be until the second half of this year, perhaps even late this year, before we see more rate cuts.

Well, I expect two, probably one in September, one in December. I think by that time there will be some clarity around President Trump's economic policies and what kind of impact they'll have. And I do suspect that the higher tariffs and deportations of immigrants will slow economic growth sufficiently that that will allow the Fed to continue to, or at least to resume cutting interest rates. I think they'll cut rates slowly. I don't think they'll move quickly because of the uncertainty around economic policy. But I do think by the end of the year it'll start cutting rates. So I'd count on two rate cuts, a quarter point each time this year.

Yeah, about a half a percentage point. So the federal funds rate target, which is the rate that the Fed controls, is sitting currently just under four and a half percent. So by the end of the year, if you told me the funds rate was closer to four percent, I'd say that sounds about right.

You know, as you know, under President Biden there was a lot of incentives, tax incentives, to move over to clean energy, away from fossil fuels, away from oil, natural gas, and coal. President Trump has a very different perspective on that, taking away those benefits and subsidies and providing them to fossil fuel. And so, you know, I think that suggests maybe we'll see somewhat lower oil prices, but really on the margin, because oil prices are determined in a global marketplace. The US has some impact on that, but so does China, so does other parts of the world. So I don't expect a big change there. And I do think it's unfortunate because clearly, you know, as we look forward, given climate change and the impact that's having on the climate and the economy, you know, the longer it takes us to transition over to clean energy, the more damage to the climate and the more damage that will be to our economy longer run. But I don't expect any major significant changes as a result of the policy, certainly not in 2025.

Yeah, President Trump's been talking about a very restrictive immigration policy on the campaign trail. He talked about mass deportation. There's 11, 12 million unauthorized immigrants in the United States, and he's talking about deporting them. You know, I don't think he'll be able to do that. I suspect, though, with some pickup in deportation, that'll cause a real tightening in the labor market, particularly in industries like agriculture, manufacturing, construction, transportation, distribution, leisure, hospitality, retailing. These are industries where immigrants play a very large role in the labor force, and if you see deportation, that's going to cause, you know, significant tightening in those labor markets. Businesses in those industries will have to raise wages, and that's another reason to be nervous about inflation in 2025 going into 2026.

I think it'd be okay, you know, not like 2024. 2024 was a very good year for the US economy: strong growth, low unemployment across all demographic groups, consumer spending was strong, the stock market was at a record high, housing values were at record highs, you know, interest rates were coming down. It really was a very good year. So it'll be very difficult for 2025 to measure up, given the policies that are going to be pursued with regard to tariffs and immigration. But, you know, having said that, the American economy feels very resilient and should be able to navigate through and have a reasonably okay year in 2025.

Well, you know, I suspect the stock market is going to go sideways here for a while. It's gone up a lot, you know, since the pandemic. Just before the pandemic, five years ago, the stock market in the US has doubled. Doubled. I mean, that's an extraordinary performance. It rose 20, 25 percent last year and 20, 25 percent the year before that. So, you know, good reasons for it. The American economy has been strong, and tech companies have been doing fabulously well. The, you know, the hyperscale, so-called hyperscalers that are now investing aggressively in artificial intelligence, they've done very, very well. But even given that, I think the stock market has discounted a lot of good news, and, you know, I suspect it's going to struggle a bit, you know, in 2025 and 2026. I don't expect a big decline, but I don't expect it to continue on the kind of rocket trajectory it's been on over the past five years.

Yeah, I'd be cautious. But look, if you're investing in the stock market, you should have a long-term horizon, you know, over the next 10 years. So the stock market will go up, it'll go down, it'll go all around. But you, as an investor, you should look through all of that and continue to look to the long run. And in the long run, I think the American economy will be fine, perform well, corporate earnings will be strong, and you'll be rewarded. So, you know, be patient, don't get caught up in the ups and downs and all arounds, and just look through it, and I think you'll be fine as an investor.

Well, the global economy has been okay. You know, it's been led by the US economy, that's been the leading economy in 2024 going into 2025. But there's a lot of variability. You know, the European economy has struggled, particularly the big German economy, it's adjusting to much higher energy costs. The big Chinese economy has been kind of okay, it's hit its growth targets with a little bit of help from the central bank and from fiscal policymakers and support. So all in all, it's been an okay year for the global economy, but lots of variability from the faster-growing US economy compared to the weaker-growing European economy.

Well, higher broad-based tariffs hurt everybody, and I think the European economy will be hit hard if, in fact, President Trump does follow through with his talk about broad-based tariffs. You know, I do think if there are higher tariffs, it probably will be on the auto industry, and the German economy will struggle with that. You know, I think the Europeans will probably retaliate. You know, they'll come back with their own tariffs and other export restrictions. And so, you know, there's no winners here, everyone's going to lose. But, you know, the European economy is struggling, so anything that will cause it to struggle more, you know, obviously that's a problem. So I think the European economy's got a struggle ahead of it if, in fact, President Trump follows through with his broad-based tariffs. But if he does follow through with substantive tariffs, I think that's going to be hard on the entire global economy, including and most significantly the European economy, because it's already so soft.