Fed Mar-25 projections lower growth, but hike inflation estimates

20 Mar 2025 , 01:09 PM

FED PROJECTIONS ISSUE WARNING ON GROWTH AND INFLATION

It is considered the standard nightmare for any economy; wherein growth slows, inflation picks up and unemployment spikes. The US economy looks likely to experience all three, at least going by the latest projections of the Federal Reserve. In its March 2025 update, Fed estimates that GDP growth for 2025 would be lower by 40 bps at 1.7%, while core inflation would be higher by 30 bps at 2.8%. Unemployment is expected to inch up 10 bps due to jobs slashing by the Trump administration. Surprisingly, the Fed projections remain the same!

HOW THE US MACRO STORY PANNED OUT IN LAST 5 YEARS

Here is a quick recap of the data points of last 5 years. These are actual data flows and updated for 2024 actuals. The shaded CY25 represents median projections.

Variable	CY-2020	CY-2021	CY-2022	CY-2023	CY-2024	CY-2025 #
Real GDP Growth	-1.0%	+5.7%	+1.3%	+3.2%	+2.5%	+1.7%
Unemployment Rate	+6.7%	+4.2%	+3.6%	+3.8%	+4.2%	+4.4%
PCE Inflation	+1.2%	+5.8%	+6.0%	+2.8%	+2.5%	+2.7%
Core PCE Inflation	+4.4%	+4.9%	+5.2%	+3.2%	+2.8%	+2.8%

Data Source: US Federal Reserve (# Median Projections)

There are 3 stories that emerge about the US economy based on a comparison of CY2025 median projections with actual data of last 5 years. Firstly, there is deterioration in macros on a consistent basis since 2023. Secondly, there has not been a perceptible reduction in inflation between 2023 and 2025. While rate cuts may not have spiked inflation, it has surely made inflation stickier.

Also, markets are expecting pressure from food and energy inflation, even as core inflation remains a challenge. Thirdly, between 2023 and 2025, GDP growth is likely to fall 140 bps while unemployment is likely to 60 bps higher. It is a myth that the US economy avoided a hard landing despite a series of rate hikes. The landing was not exactly as hard as projected, but monetary tightness of 2022 has come at a stiff cost.

PRESENT DAY – MARCH 2025 FOMC PROJECTIONS (VERSUS DECMBER 2024)

With the latest update on March 2025 US projections, we can compare the projections on macros vis-à-vis the December 2024 estimates. That is captured in the table.

Variable	CY-2025	CY-2026	CY-2027	Longer run
Change in real GDP (Mar-25)	1.7	1.8	1.8	1.8
Dec-2024 projection	2.1	2.0	1.9	1.8
Unemployment rate (Mar-25)	4.4	4.3	4.3	4.2
Dec-2024 projection	4.3	4.3	4.3	4.2
PCE inflation (Mar-25)	2.7	2.2	2.0	2.0
Dec-2024 projection	2.5	2.1	2.0	2.0
Core PCE inflation (Mar-25)	2.8	2.2	2.0
Dec-2024 projection	2.5	2.2	2.0
Federal funds rate (Mar-25)	3.9	3.4	3.1	3.0
Dec-2024 projection	3.9	3.4	3.1	3.0

 

Data Source: US Federal Reserve (CY refers to calendar year)

Here are 4 key changes we see in March 2025 projections, compared to the comparable projections of macros made in December 2024.

• The Trump tariffs appears to be taking its toll on the GDP growth. After projecting GDP growth at 2.1% for year 2025 in December 2024, that growth projection has been sharply scaled down to 1.7% on concerns over the impact of reciprocal tariffs.
• With the US government intent on downsizing the government machinery and a lag effect of the growth slowdown, unemployment rate is expected to be higher by 10 bps at 4.4% in year 2025. However, that is likely to normalize from 2026 onwards.
• Inflation in 2025 is likely to 20 bps higher than the estimate in December due to the combined impact of import tariffs and deportation of immigrants. That is likely to raise labour costs, pushing up core inflation on the fringes.
• However, the interesting part of the projections is that it does not foresee any change in the rate trajectory. The estimates envisage a 50 bps rate cut in 2025 and an additional 50 bps rate cut in 2026; with rates in the range of 3.25% to 3.50%.

What would these changed projections mean for the Indian economy?

WILL THESE PROJECTIONS CHANGES HAVE AN IMPACT ON INDIA INC?

For the RBI and for the Indian economy, there are 3 key takeaways from these changed Fed macro projections. Firstly, the US GDP growth for 2025 has been cut from 2.1% to 1.7%. That comes with lower export potential, lower tech spending and an impact on Indian trade and GDP growth overall. Secondly, core inflation is likely to make a comeback, and that normally has a global spillover effect. Going ahead, India may have a core inflation problem to contend with. Lastly, the rate cuts are going to be limited to 2 in 2025 and 1 or 2 in 2026. That reduces the pressure on RBI to cut rates, but could also impact portfolio flows into EMs. The changed projections surely hint at more complex equations emerging!