The Congressional Budget Office predicts that GDP growth will slow to 1.4% in 2025, down from 1.9%. This decline is attributed to tariffs and reduced immigration. However, growth is expected to rise to 2.2% in 2026 due to supportive fiscal policies. By 2027 and 2028, growth will stabilize at around 1.8%, leading to a slight overall GDP increase by the end of 2028. Inflation is anticipated to reach 3.1% in 2025 because of tariffs. It should drop to 2.4% in 2026 as these tariffs take less effect and hit the Federal Reserve’s target of 2.0% by 2027. This level of inflation is expected to remain steady through 2028. The unemployment rate is likely to increase to 4.5% in 2025, but then decrease to 4.2% in 2026 due to fiscal stimulus, remaining close to 4.4% in 2027 and beyond.

Interest Rate Projections

Interest rates are set to be 4.5% in August 2025, with the Federal Reserve likely lowering them to between 3.5% and 3.6% in 2026. Rates are expected to stabilize at 3.3% by 2027 and 2028. Additionally, the 10-year Treasury is projected to fall from 4.3% in late 2025 to 3.9% by Q4 2028. Looking ahead in 2025, we can expect more market fluctuations. Slower economic growth combined with stubborn inflation creates uncertainty for investors. This scenario suggests preparing for increased volatility, possibly using VIX derivatives, especially since the August Consumer Price Index (CPI) report shows inflation still high at 3.5%.

Economic and Market Outlook

We should rethink expectations for quick Federal Reserve rate cuts. With inflation projected to end the year at 3.1%, the Fed’s ability to ease policies could be limited, potentially keeping short-term rates higher for longer than we thought. Any derivative strategies involving the yield curve, particularly with SOFR futures, should consider a slower rate cut schedule. A GDP growth forecast of 1.4% and an unemployment rate of 4.5% indicate tough times for corporate profits through the end of the year. This weak demand may warrant a more cautious or even bearish stance on major equity indices like the S&P 500. The latest job report showed a cooling labor market with an unemployment rate rising to 4.2%, which reinforces this cautious outlook. This situation feels reminiscent of previous cycles where stubborn inflation made the Fed maintain tighter policies despite a weakening economy. While we expect a rebound in 2026 due to fiscal stimulus, our immediate focus should be on the stagflation pressures looming in the next few months. We should also be careful not to position ourselves for that 2026 recovery too soon. Create your live VT Markets account and start trading now.

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