2025 Economic Outlook: Inflation, Interest Rates, and What We're Watching
Every year seems to come with a new list of investor concerns.
Last year, much of the focus centered on the election and the uncertainty surrounding its potential impact on markets and the economy. Now that the election is behind us, the conversations we're having with clients have shifted back to the factors that tend to matter most over the long run: inflation, interest rates, economic growth, and Federal Reserve policy.
In this video, we share our perspective on where we believe the economy stands today and the key themes we're watching as we move through 2025.
Being Mindful, Not Fearful
One of the ideas we discuss in this update is the difference between being mindful and being fearful.
Markets and economies are constantly evolving, and there will always be reasons for concern. In our experience, however, investors often spend too much time worrying about unlikely outcomes while overlooking the factors that are actually shaping economic conditions.
As we look at 2025, our attention remains focused on inflation, economic growth trends, and the challenges facing the Federal Reserve as it attempts to balance both. These are the variables we believe deserve the closest attention.
Inflation Has Improved, But the Story Isn't Over
Inflation has moderated significantly from the elevated levels experienced over the past several years. However, it remains above the Federal Reserve's long-term target and continues to influence interest rates, borrowing costs, consumer spending, and business activity.
While inflation trends have improved, we continue to monitor several factors that could create renewed pressure, including energy prices, commodity costs, tariffs, and geopolitical developments around the world.
The Federal Reserve's Balancing Act
After aggressively raising interest rates to combat inflation, the Federal Reserve began lowering rates during the second half of 2024. Even so, interest rates remain higher than many investors became accustomed to during the previous decade.
The challenge facing policymakers is that inflation and economic growth do not always move in the same direction. Lowering rates too aggressively could reignite inflation, while maintaining restrictive policies for too long could create unnecessary pressure on economic growth.
As a result, Federal Reserve decisions are likely to remain one of the most important drivers of market sentiment throughout the year.
A "Plow Horse" Economy
When discussing the current economy, we've often used a simple analogy: a plow horse.
The economy is not sprinting ahead at an unsustainable pace, nor does it appear to be stalling. Instead, it continues moving forward steadily, supported by healthy employment levels, moderate inflation, and resilient economic activity.
While economic risks always exist, our view remains that the economy is continuing to progress at a measured pace rather than heading toward a significant downturn.
Staying Focused on the Long Term
Economic forecasts will change. Interest rate expectations will evolve. Headlines will continue to create uncertainty.
Rather than attempting to predict every market movement, we continue to believe that maintaining a long-term perspective, remaining flexible, and focusing on a disciplined financial plan are among the most effective ways to navigate changing market environments.
Watch the video to hear our thoughts on inflation, interest rates, Federal Reserve policy, economic growth, and the themes we believe investors should be paying attention to throughout 2025.
