Inflationary pressures have yet to ease! Economists: GDP growth exceeds expectations, may raise interest rates again next year

Economic performance is overheated, and the Fed is afraid it will be difficult to cut interest rates

The Federal Reserve (Fed) began a historic rate hike cycle in March 2022. It was widely expected that there might be a chance of rate cuts next year (2025), but Torsten Slok, partner and chief economist at Apollo Global Management, has expressed the opposite view. He said on CNBC's program 'The Exchange' that the economic data is far stronger than expected, and with inflation still above target levels, the Fed may not only maintain interest rates but may also raise them further in 2025.

According to Atlanta Fed data, the US GDP growth rate in Q3 2024 is expected to reach 2.8%, and even 3.3% in Q4, which is significantly higher than the estimated target of the Congressional Budget Office's (CBO) "sustainable 2% growth". Slok pointed out that these figures indicate that the previous rapid rate hikes have not completely cooled the economy. "Inflation also remains sticky." In November, the year-on-year growth rate of the Consumer Price Index (CPI) was reported at 3.3%, while Atlanta Fed's "permanent CPI" and Cleveland Fed's "median CPI" were also between 3% and 4%, still a long way from the Fed's 2% inflation target.

Source: Atlanta Fed Atlanta Fed predicts that GDP growth in the fourth quarter is expected to reach 3.3%

"The current strong growth and persistent inflation suggest that monetary policy may not be as tight as imagined," Slok said. He also mentioned that if the Trump administration regains power after the 2024 US election, its potential tax and trade policies could further drive economic expansion and inflation. "Measures such as reducing domestic corporate tax rates, reducing immigration, and adjusting tariffs may bring additional upward pressure on prices." Slok believes that if inflation does not quickly fall back, the reasons for the Fed to cut interest rates will be even less sufficient.

Financial conditions are loose, and the risk of interest rate hikes is increasing.

In addition to the strengthening of the real economy, Slok also warned that the recent rise in the stock market and the cryptocurrency market, along with relatively loose financial conditions, could easily foster investment optimism, leading to potential 'overheating' risks. He attributed this to the 'election year frenzy', but at the same time warned that the relaxed financial environment may contradict the Fed's 'suppressed demand' goal, adding fuel to subsequent inflation.

Contrary to the widely expected view of "interest rate cut in mid-2025", Slok directly put forward the radical view that "interest rates may be raised again next year". He said that the current data all the way to "the Fed needs to put the brakes on again", does not rule out that if inflation does not fall but rises in 2025, or encounters major measures to stimulate consumption at the policy level, interest rate hikes will become a last resort.

"The Fed needs to pay more attention to the dynamics of the real world, rather than just following theoretical models for judgment." With the expectation of interest rate hikes reemerging, how will the market respond?

Slok's argument is not good news for market investors. Since the end of 2023, the market's implied expected interest rate is expected to turn downward in early 2025, supporting the rise of the stock market and some risky assets. However, if inflation does not slow down, coupled with expectations of a further interest rate hike, it may suppress market risk appetite and cause new volatility in the stock, bond, and crypto markets.

"After the Federal Reserve's strong interest rate hike, the U.S. economy can still grow against the trend to over 3%, indicating that monetary policy may not be as effective in suppressing demand as imagined." Slok also emphasized that if the Trump administration reintroduces tax cuts and protectionist measures, potential inflation and capital flows will surely intensify. "Investors should be aware of the possibility of further interest rate hikes in 2025," he reiterated. "All signs indicate that the interest rate trend next year should not be overly optimistic."

【Disclaimer】There are risks in the market, and investment needs to be cautious. This article does not constitute investment advice, and users should consider whether any opinions, viewpoints, or conclusions in this article are suitable for their specific circumstances. Investing based on this is at your own risk.

The pressure of US inflation has not diminished! Economists: GDP growth exceeds expectations, and interest rates may rise again next year. This article was first published in 'Crypto City'.