The US economy is at a pivotal juncture, with recent data pointing to a significant slowdown in GDP growth for Q4 2025 following a strong Q3, while inflation remains stubbornly above the Federal Reserve's 2% target. This combination is creating a complex policy environment, challenging market expectations for imminent interest rate cuts.
According to preliminary data, Q3 2025 GDP grew at a robust 4.2%, driven by a surge in consumer spending and inventory rebuilding. However, forecasts for Q4 have been revised down sharply to a range of 1.8% to 2.2%. Key indicators confirm this deceleration: retail sales growth dropped to 0.3% in November, manufacturing activity has contracted, and job creation slowed to 150,000 in November from a Q3 monthly average of 255,000.
Simultaneously, inflation metrics, particularly the core Personal Consumption Expenditures (PCE) index, show persistent stickiness, especially in service sectors. This "last mile" of disinflation is proving difficult, influenced by a tight labor market and elevated housing costs. Analysis from Commerzbank highlights that this environment, where strong growth coexists with persistent inflation, presents a dilemma for the Federal Reserve.
Federal Reserve Chair Jerome Powell has emphasized a data-dependent approach, stating the central bank needs "greater confidence" in sustainable inflation reduction before considering policy easing. Consequently, financial markets have undergone a significant repricing. Expectations for the first rate cut have been pushed back from March to July 2025, with the total number of anticipated 2025 cuts reduced from four to just two. The 10-year Treasury yield has risen approximately 40 basis points in response.
The projected growth slowdown, while a natural moderation after a strong quarter, reflects broader pressures from the Fed's prior restrictive monetary policy, which continues to affect business investment and housing. The global context adds another layer, with the US economic trajectory diverging from weaker growth but faster disinflation in the Eurozone.
