Have we avoided the U.S. recession that almost everyone was calling for in early 2025? Are jobs plentiful and the unemployment rate likely to fall? Are consumers flush with money and new credit with the ability to pay even higher prices (i.e., able to keep up with further inflation)? If that’s the case, it would be no wonder that the U.S. Federal Reserve would be on hold. Under such circumstances, it would seem appropriate for the Fed to be outright hawkish, seeking to raise interest rates to prevent the U.S. economy from overheating.
Yet, as we move through midyear, the U.S. Consumer Price Index remains elevated (above the U.S. Federal Reserve’s inflation target) relative to where things were prior to the massive supply shock that occurred just after port strikes and ships blocking canals or striking bridges. However, the CPI has actually been slowing (i.e., it’s disinflationary, to wit, prices are increasing at a slower rate). Thus, both sides of the inflation debate have a reasonable point. With that credence, it provide aircover for the U.S. Federal Reserve Chair’s stance of remaining on hold pertaining to the fed funds rate.
Yet, the preponderance of other economic data appears to be indicating that the U.S. economy is generally slowing. It has been categorized by some economists as a low-to-no growth economy. Other economist have said we are facing an economy that has forgotten how to grow.
U.S. consumers appear to be concerned about their income’s ability to keep up with their living expenses. Indicatively so, U.S. Retail Sales are beginning to show signs that spending has been retracting. Student loan forbearance has ended and unsurprisingly delinquencies are on the rise. Similarly, credit cards, auto loans, and mortgage delinquencies are also increasing. The Bureau of Labor Statistics, Labor Force Participation rate has been on the decline since August of 2023 (meaning more people aren’t working and counted in the labor pool), while the Job Quit Index has plummeted since its March 2022 peak (i.e., more employees are hoping to keep or just hold onto jobs that they may not even like). Impressively, even with numerous revisions to the non-farm payroll numbers and changes the index methodology, along with other types of gyrations, the U.S. Unemployment Rate has been able to remain at a low of 4.1% for June 2025. It’s also important to highlight that the Unemployment Rate is an incredibility lagging indicator.
Still, the U.S. Real Gross Domestic Product has been in a low-to-no growth channel. Businesses have become more cautious with the Trump Administration’s reductions to government spending or from its willingness to cut programs outright. Furthermore, companies back in the spring pulled their inventory spending forward in order to get in front of the higher tariff concerns or perhaps they were concerned with the elevated geopolitical risks that have been prevailing. Either way, these events have been whipsawing the markets and heightening investors’ uncertainty concerns.
So, does the bond market have it wrong? Market participants appear divided. Bond pricing implies expectations of future rate cuts, suggesting investors are anticipating deeper economic weakness. However, if inflation proves sticky and consumers remain fragile, the Fed may be forced to maintain—or even resume—tightening. If so, markets pricing in multiple cuts may be premature.
The U.S. economy has thus far avoided a recession (technical or not), but the fundamentals appear to be weakening. Jobs are still available, but fewer people are quitting or joining the labor force. Prices are still rising, albeit more slowly. Consumers are stretched, facing higher living costs and limited credit access. Businesses are cautious, having already front-loaded investment.
With the Fed is on hold, there’s room to adjust in either direction—but is unlikely that they will cut prematurely. In this type of environment and with these numbers being reported, the Fed’s caution may be warranted. The data presents a mixed but fragile picture, and a shift in either inflation or employment could force the Fed’s hand. Whether this current pause proves sustainable—or just a breather before the next economic turn—remains to be seen. Until the economy breaks bad or the President can jawbone the markets, the Fed’s hands seem to be tied!
Source: Bloomberg LP. Content should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Material presented is believed to be from reliable sources, however, we make no representations as to its accuracy or completeness. This document does not constitute advice or a recommendation or offer to sell or a solicitation to deal in any security or financial product.
