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Did someone say rate hike?

The US economy is strong enough and inflation is high enough that the Federal Reserve could hike rates next year.
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Anna Moneymaker/Getty Images

less than 3 min read

On paper, the US economy is humming. The labor market is solid, inflation is abating, and Taylor Swift just injected billions of dollars into cities across the country. Next year is expected to bring more of the same: The IMF forecasts US GDP will rise 2.2% in 2025, above the average 1.8% growth rate among other advanced economies.

Things are going well…too well.

The Federal Reserve has cut interest rates at its last two meetings, and Powell & Co. have indicated that more cuts are coming, perhaps even as soon as next week. But Apollo Global Management’s Chief Economist Torsten Sløk recently asked a question that investors everywhere dread the answer to: Will the Fed hike rates in 2025?

Not again

In a recent blog post, Sløk highlighted some of the economy’s latest wins, including GDP growth of 2.8% last quarter and expectations of another 3.3% growth this quarter. But that may mean that the Fed actually has some wiggle room to raise rates without derailing economic growth, particularly if the economy is still looking healthy next year, as Jerome Powell has hinted at.

“In other words, momentum in the economy is strong, and the incoming administration may add additional tailwinds to the outlook,” Sløk wrote. “Combined with the recent uptrend in inflation, the probability is rising that the Fed may have to raise interest rates in 2025.”

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The idea isn’t outside the realm of possibility. Back in the 1970s, inflation seemed to be tamed before it proved to be anything but.

A chart of inflation today compared to the 1970s

Apollo Global Management

Recent readings showed that inflation isn’t falling as quickly as economists had hoped, and some are beginning to worry that it could rear its head once again under a second Trump administration. Tax cuts, higher tariffs, and a larger deficit are all distinct possibilities that could combine to reinflate inflation.

Don’t panic just yet. 90% of the economists polled by Reuters expect another 25 bps rate cut after the Fed’s next meeting concludes on December 18.

But there’s a telltale hint of worry in their predictions: Over 58% of those economists also believe that the Fed will pause rate cuts at its first meeting of 2025 in January as the central bank takes stock of the economy under a new administration.

Tomorrow’s CPI report will play a key role in determining what’s next for rate cuts, the markets, and the US economy. Stay tuned.—MR

Making sense of market moves

Stay up to date on the latest market news with daily analysis of the investing landscape, served up Brew-style.