Fed rate cuts offset by rising interest rates: Despite recent interest rate cuts by the Federal Reserve, borrowing costs for consumers and businesses have moved higher in response to market expectations of the incoming administration’s policies, such as tariffs and tax cuts. Mortgage rates have risen as the bond market adjusts to forecasts of sustained economic growth and potential inflation. While some borrowers, like variable-rate credit card holders, have seen slight decreases, new loans, including mortgages and long-term financing, remain costly. This reflects the impact of rising long-term bond yields, which are shaped by market conditions and inflation expectations rather than Fed policy alone.
Looking ahead, further Fed rate cuts are likely to be gradual, as strong economic performance reduces the urgency for aggressive easing. Borrowing rates, particularly for mortgages, may remain elevated until broader economic conditions shift.
Economic resilience with inflationary risks: The U.S. economy has shown remarkable resilience, with third-quarter growth reaching 2.8%. Consumer spending remains strong, and the labor market continues to perform well. However, recent election outcomes and potential policy shifts are introducing inflationary risks that could influence the economic outlook.
Proposed tariff adjustments may raise the cost of imported goods, potentially increasing prices for consumers and businesses. Industries reliant on global supply chains, such as manufacturing and retail, could face higher input costs, leading to broader inflationary pressures. In addition, the immigration and deportation policies being discussed are likely to impact the availability of labor, particularly in agriculture and home improvement sectors. These industries rely heavily on immigrant labor to meet seasonal and ongoing demands. A reduced labor supply could drive up wages and increase the cost of goods and services.
Geopolitical tensions: Global geopolitical developments remain a significant source of uncertainty. Key areas of concern include U.S.-China relations and ongoing negotiations over trade policies, which could affect corporate earnings tied to international markets. Rising tensions in other regions, such as the Middle East, have led to fluctuations in energy prices. These developments have the potential to influence market sentiment and create volatility, particularly in sectors like energy and manufacturing.