CNR Speedometers^®

The U.S. economy remains on solid footing heading into the new year. Our GDP growth forecast for 2025 ranges between 1.75% and 2.25%, reflecting steady, sustainable expansion. Inflation continues to moderate, and we anticipate it will end the year solidly below 3% with some measures even approaching 2% by the third quarter. Meanwhile, the labor market remains strong with wage growth providing a crucial foundation for economic momentum. Today, I'll focus on three critical speedometers, monetary policy, interest rates, and the job market.

Dial 1: Monetary Policy, 0:54— The Federal Reserve continues its easing cycle, but at a deliberate and measured pace. After a 25-basis-point cut in December, the Fed signaled a slower trajectory for additional rate reductions. Our forecast remains firm at two rate cuts in 2025, consistent with the stance we've maintained since last fall.

Despite concerns that inflation could reaccelerate, we believe these fears are overblown. Price pressures continue to ease, and core inflation is likely to trend lower throughout the year. The Fed's cautious approach reflects its goal of balancing inflation risks without stifling economic growth. While we signal some caution on the speedometer, monetary policy remains broadly supportive of the economy.

Dial 2: Interest Rates, 1:33— Interest rates have risen sharply in early 2025, drawing significant attention. Our model forecasts the 10-year Treasury yield at 4.71% by the end of January. However, following a strong jobs report, the yield is now approaching 4.8%. This move underscores the sensitivity of markets to economic data and reflects lingering uncertainty around policy direction.

While this rise may appear unsettling, we believe it's a reaction to immediate data rather than a signal of structural issues. Inflation expectations remain well anchored, and it's too soon to assume rates will spiral out of control. Our end-of-year Fed funds rate forecast remains at 3.75% to 4.25%, aligning with expectations for moderated policy adjustments.

In this environment, fixed income investors should focus on the opportunity in gross yields, which remain attractive, particularly in high-quality bonds. The labor market continues to shine as a pillar of economic strength.

Dial 3: Labor Market, 2:28— The latest jobs report exceeded expectations, with wage growth holding steady at 3.9% and unemployment remaining historically low. These figures underscore the resilience of the labor market, which continues to support consumer confidence and spending.

With the robust job market underpinning the economy, we remain optimistic about its ability to absorb shocks and sustain growth. While some sectors show signs of normalization, the overall strength of the labor market is a key driver of our positive economic outlook.

Corporate profit expectations also remain solid, with double-digit growth anticipated in 2025. The pro-business tone set by the new administration is likely to support continued economic expansion. After a 2024 largely driven by multiple expansions, we expect equity returns in 2025 to moderate to high single digits, driven by fundamentals and earnings growth. Valuations do remain elevated, but broadening sector participation and robust corporate profits provide a strong foundation. While challenges persist, such as elevated rates and geopolitical uncertainties, equities remain an attractive component of a diversified portfolio.

So, as we begin 2025, the U.S. economy is well positioned for a year of steady growth. Monetary policy remains supportive, but the Fed's slower pace warrants cautious optimism. Interest rates, while rising, reflect transient factors and present opportunities in high-quality fixed income. And the labor market continues to demonstrate resilience, fueling broader economic stability.

Our Speedometers^® reflect a constructive and balanced outlook with optimism for equities, caution on interest rates, and confidence in the resilience of the labor market. While uncertainties do remain, we believe the economy is well equipped to navigate these challenges.