Fed Dec-25 projections hint at higher GDP growth, but sticky inflation

17 Dec 2025 , 01:27 PM

MACRO PROJECTIONS STABLE, ON TRACK SINCE SEPTEMBER 

Despite the risk of steep tariffs imposed by the US and the prolonged shutdown in October and November, the macro projections for December have not changed much. One reason could be that there were not enough data points due to the 45-day shutdown. However, there are interesting points that emerge from the December macro projections update. 

Growth is likely to see a sharp revival in 2025 and 2026, while unemployment is likely to remain in the range of 4.4% to 4.5% for next 3 years. Inflation is expected to taper after the one-time impact of tariffs are factored in. However, the PCE inflation is expected to be around 2.1% well into 2028. Rate cuts trajectory for 2026 and 2027 is likely to be tepid. 

US MACRO STORY PATH IN LAST 4 YEARS 

Here is a quick recap of the data points of last 4 years with median projections. 

Variable	CY-2021	CY-2022	CY-2023	CY-2024	CY-2025 #	CY-2026 #
Real GDP Growth	+5.7%	+1.3%	+3.2%	+2.5%	+1.7%	+2.3%
Unemployment Rate	+4.2%	+3.6%	+3.8%	+4.2%	+4.5%	+4.4%
PCE Inflation	+5.8%	+6.0%	+2.8%	+2.5%	+2.9%	+2.4%
Core PCE Inflation	+4.9%	+5.2%	+3.2%	+2.8%	+3.0%	+2.5%

Data Source: US Federal Reserve (# Median Projections) 

In the above table, data up to CY2024 are actuals, while data for CY2025 and CY2026 are median projections. Looking back at last 4 years since the COVID bottom, some trends are unmissable. Growth has fallen from the highs of 2023 but is showing signs of bottoming out. Unemployment is 100 bps higher than 2022, but at more realistic levels. The real gains have been on the inflation front, although the last mile is proving to be really tough. 

DECEMBER 2025 FOMC PROJECTIONS (VERSUS LAST 2 QUARTERS) 

To get a comparative perspective, we look at December 2025 projections; compared with the earlier September 2025 and June 2025 projections. 

Variable	CY-2025	CY-2026	CY-2027	Longer run
Change in real GDP (Dec-25)	1.7	2.3	2.0	1.8
Sep-2025 projection	1.6	1.8	1.9	1.8
Jun-2025 projection	1.4	1.6	1.8	1.8
Unemployment rate (Dec-25)	4.5	4.4	4.2	4.2
Sep-2025 projection	4.5	4.4	4.3	4.2
Jun-2025 projection	4.5	4.5	4.4	4.2
PCE inflation (Dec-25)	2.9	2.4	2.1	2.0
Sep-2025 projection	3.0	2.6	2.1	2.0
Jun-2025 projection	3.0	2.4	2.1	2.0
Core PCE inflation (Dec-25)	3.0	2.5	2.1
Sep-2025 projection	3.1	2.6	2.1
Jun-2025 projection	3.1	2.4	2.1
Federal funds rate (Dec-25)	3.6	3.4	3.1	3.0
Sep-2025 projection	3.6	3.4	3.1	3.0
Jun-2025 projection	3.9	3.6	3.4	3.0
Data Source: US Federal Reserve (CY refers to calendar year)

Here are 4 key takeaways from the table above. 

• US GDP growth for 2025 has been upgraded by 10 bps while for 2026 it has been upgraded by 50 bps over the September projection. Clearly, the FOMC projections are betting on a sharp revival in GDP growth post the impact of the tariffs.

• While the unemployment is expected to reduce gradually with GDP growth, the job accretion is likely to be slow amidst increased use of AI and ML. Unemployment will, however, stay well above the 3.5% full employment level.

• PCE inflation projection for CY2025 has been reduced by 10 bps and for CY2026 by 20 bps. However, the FOMC is expecting the PCE inflation to stay above the 2.0% long-term target, at least well into the calendar year 2028.

• Much of the anticipated rate cuts have already been front-loaded (75 bps in 2025 and 100 bps in 2024). Hence, the best case is another 50 bps by end of 2027, and an additional 25 bps possibly after 2028. 

Let us now turn to the India impact of these projections. 

HOW DECMBER 2025 FED PROJECTIONS WILL IMPACT INDIA INC? 

In the latest update, the FOMC has made some marginal changes to the growth and inflation projections. Here is what these could mean for the Indian economy. 

• Firstly, the US GDP growth for 2025 has been raised by 30 bps since June from 1.4% to 1.7%. The 2026 GDP growth projection has been upped sharply by 50 bps over the September projection, hinting at a sharp revival next year. Clearly, that gives India enough time to stitch the trade deal and make up for the lost exports in 2025.

• Secondly, in the coming months, the Fed will have to work more on PCE inflation rather than on unemployment. That is likely to result in a priority change and that means focus on a stable dollar. That will be positive for sectors like IT and healthcare in India.

• Lastly, rate cuts are mostly done and dusted with the front-loading in 2025. With the Fed monetary policy leaning towards status quo, the pressure of monetary divergence on the RBI reduces. That will give the RBI more policy leeway. 

The one message from the December macro update is that year 2026 may be substantially better than 2025 for the US economy. That is good news for India too!