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Fiscal Outlook for the US has Darkened in the New Year
In 2025, the U.S. economy faces ongoing challenges from inflation and rising debt, with policymakers focused on balancing recovery efforts and ensuring fiscal sustainability amid an uncertain outlook.
The U.S. economy faced significant challenges in 2024, as the lingering effects of high inflation and rising federal debt shaped the financial landscape. While progress was made in controlling inflation, economic uncertainty and fiscal pressures remained central concerns for policymakers, businesses, and households. The interplay between inflation, interest rates, and federal spending highlighted the complexity of navigating economic recovery in a post-pandemic world.
Inflation has gradually eased from a peak of 9% in 2022, but in 2024, consumers continued to feel the effects of years of rising prices. By the end of 2024, goods and services were approximately 20% more expensive than when President Joe Biden took office.
While inflation slowed significantly in the latter half of 2022 and throughout 2023, its decline in 2024 was less pronounced. The Federal Reserve, targeting 2% inflation, made progress but faced challenges reaching its goal. The Fed raised interest rates to a peak of 5.25%–5.50% in response to inflation but began cutting rates in September and November 2024. Analysts expect more rate cuts in 2025.
Inflation was a major political concern, with many voters citing it as their top issue. High interest rates created a perception of economic instability, even as unemployment remained low and economic growth was steady. The consumer price index (CPI), the most closely watched inflation measure, fell from 3.1% in January to 2.7% by year-end, briefly reaching 2.4% in September. Personal consumption expenditures (PCE) inflation dropped from 2.6% to 2.3%, hitting a low of 2.1% in September.
Meanwhile, the federal government’s fiscal outlook darkened due to rising interest costs and spending. Interest payments on public debt increased by $240 billion in 2024, reaching $950 billion. Social Security and Medicare spending also rose, driven by cost-of-living adjustments, increased enrollment, and higher service payment rates.
Despite the Fed’s short-term rate cuts, yields on 10-year and 5-year Treasurys remained elevated, contributing to higher borrowing costs. The national debt rose from $35 trillion in July to $36 trillion by year-end, with debt per citizen exceeding $107,000. Federal borrowing was also staggering, with $622 billion borrowed in just the first two months of the fiscal year and $365 billion in November alone.
Maya MacGuineas, president of the Committee for a Responsible Federal Budget, warned that the rapid rise in debt threatens essential programs like Social Security and Medicare. The Medicare trust fund is projected to run out by 2036, and the Social Security trust fund is expected to be exhausted by 2035. These looming challenges highlight the fiscal strain of rising deficits, which climbed to $1.8 trillion in fiscal 2024, the highest in three years.
The economic outlook remains uncertain as the federal government grapples with balancing inflation control, interest rate policies, and the long-term sustainability of vital programs.
The first FOMC announcment on rate changes will be on January 29th and 2pm EST. These meetings are pivotal for setting monetary policy and influencing economic conditions.
Market participants closely monitor them for indications of future interest rate adjustments.
The FOMC's decisions during these sessions will be crucial in shaping the economic landscape in 2025.
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