With the US economy shrinking unexpectedly during the first quarter of 2025, anticipations that the Fed will gradually introduce rate cuts are high.
Federal reserve policymakers, however, are unlikely to read too much into the first-quarter GDP decline, though traders believe clearer signs of economic weakness by June could prompt the central bank to start cutting interest rates again, potentially lowering them by a full percentage point before the year ends, Reuters reported.
Figures released by the US Commerce Department on Wednesday showed that the economy contracted at an annual rate of 0.3%, falling far short of forecasts and marking a sharp reversal from the 2.4% growth recorded in the last quarter of 2024. The downturn, which caught markets off guard, was fuelled by a jump in imports, slowing consumer spending, and weaker government expenditure.
“The downturn in real GDP in the first quarter reflected an upturn in imports, a deceleration in consumer spending, and a downturn in government spending,” the commerce department reported. Consumer spending alone slumped to a 1.8% annual pace, down from 4% in the previous quarter, highlighting the toll that economic uncertainty is taking on households.
The contraction has deepened concerns about the health of the US economy, with all three major Wall Street indices falling sharply in early trading. While Federal Reserve policymakers have so far brushed off the GDP decline, financial markets are now betting that the central bank will be compelled to act by June, should further signs of economic weakness emerge.
Earlier, Fed Chair Jerome Powell had said that the central bank would hold steady on interest rates while it waited for “greater clarity” on the economic impact of President Trump’s policies.
Trump’s tariff policies present a challenge for the Federal Reserve as it works to maintain price stability and full employment, and tackling the widespread discouragement due to the fall in GDP.