The Risks the US Economy Is Facing in 2025

Last week turned out to be a wild one in the markets.  As expected, the Fed continued to lower rates, dropping the Fed funds rate by twenty-five basis points, but the market reacted horribly to the rate cut.   Stocks sold off sharply and left many investors stranded with fresh long positions at all-time high prices. More specifically, the market reacted horribly to Powell’s comments after the rate move as he noted that the Fed will have to slow down the pace of future rate cuts and maintain a more restrictive interest policy due to the persistence of inflation in the economy.  He noted that the employment market remains solid, so he finally recognized that the Fed needs to focus on addressing the very real problem of inflation rather than the fear of potential weakness in the employment sector.  I will address this shortly, but first I want to focus on Powell’s insistence that the current level of interest rates in the US is restrictive.