​Throughout 2025, the US macroeconomic environment was characterised by a gradual normalisation following the post-inflation shock period of prior years. Inflation was largely brought under control, consistently hovering in a narrow 2-3% range - still above the Federal Reserve’s formal 2% target, but sufficiently contained to reduce its dominance in policy deliberations. As price pressures stabilised, the Fed progressively shifted its focus towards labour-market dynamics, with unemployment emerging as the marginal variable guiding monetary policy decisions. During the first half of the year, policymakers remained deliberately cautious, refraining from early rate cuts amid concerns that premature easing could reignite inflation, particularly given still-historically strong employment conditions, even as unemployment began to trend higher. This stance changed in the autumn and winter months, when a clearer softening in labour markets, combined with inflation remaining at tolerable levels, provided the Fed with sufficient confidence to pivot. Over this period, the central bank implemented three 25 basis-point rate cuts, signalling a controlled transition towards a more accommodative stance while maintaining credibility on inflation containment.

​Last week, President Donald Trump reignited global trade tensions by continuing his tariff policy. During “Liberation Day,” the President announced a sweeping plan, imposing a baseline 10% tariff on all imports and sharply escalating tariffs on countries deemed to have unfair trade practices. For those countries, tariffs of up to 50% were announced. China was hit hardest, with tariffs reaching as high as 145%. While many countries chose to limit retaliatory measures and instead focus on reaching an agreement with the US, China imposed matching tariffs of up to 125% on US products, blacklisted several American companies, and restricted exports of key materials. The latter includes rare earth metals, which are crucial in today’s world as they are vital for many technological products. In response to global backlash, Trump announced a 90-day delay on the tariff increases for most countries (excluding China), attempting to contain diplomatic fallout while maintaining a tough stance on trade imbalances. Amid further concerns that tariffs on key growth-spurring sectors such as technology and pharma could backfire, the administration announced additional reprieve by limiting tariffs on such critical goods.

​US inflation has fallen significantly since 2023. At the end of 2023 and the beginning of 2024, US inflation hovered just above 3%, before falling to just below 3% for the remainder of 2024. In September 2024, inflation was on a promising trajectory before picking up in the remaining months. Under "normal" circumstances, inflation is expected to remain between 2% and 3% throughout 2025, with a tendency to fall to 2% by the end of the year. Although inflation has become a frequent topic of discussion, it is still important that it stays below 2% in order to stabilise the economy. Its importance has diminished, especially for the Federal Reserve, which has based most of its recent interest rate decisions on the US labour market. The Fed hiked rates aggressively in 2022 and 2023. Its rate rose to 5.25% - 5.5% by the end of 2023. Initially, markets expected rate cuts in early 2024 to gradually counteract the potential recession. The Fed did not cut rates until autumn 2024, citing the solid state of the economy due to a strong labour market. As soon as this market showed signs of weakness, the Fed began to cut rates aggressively, surprising market participants. However, in its latest cut to 4.25% - 4.5% in December 2024, Powell stated that the Fed would stop cutting aggressively in 2025. He outlined only two 25bp cuts in 2025, which would bring the federal funds rate to between 3.75% and 4% by the end of 2025. Prior to the meeting, expectations were for at least 1% cuts in 2025. Figure 1 shows these developments in more detail.

2023 followed the core theme of 2022 with a key focus on inflation and interest rates. At the beginning of 2023, inflation was a huge concern, due to its high level. In the US, inflation was at 6.5% and already declined substantially from its peak in June 2022 at 9.1%. This trend continued in 2023 until it reached its bottom in June 2023 at 3%. Since then, US inflation remained steady between 3% and 4%. The EU and the UK saw a very similar development of inflation throughout 2022. Their respective inflation started at around 5.5% in January 2022 and rose to 10.5% by the end of 2022. As soon as 2023 started, inflation in the EU started to decline and eventually declined to as low as 3.1% in November 2023. Despite this promising development, inflation began to increase again to 3.4% in December 2023. While the UK’s inflation development was almost equivalent to the EU’s in 2022, this changed in 2023. Inflation in the UK remained above 10% until April 2023, at which point inflation was at 10% or higher for almost an entire year. Nonetheless, UK inflation also came down later in 2023 and reached the 4% mark at the end of December 2023. Based on the overall relatively similar development of inflation around the world, it is likely that inflation will stay at elevated levels in the short term. Another key reason for relatively stale inflation is that central banks stopped hiking their interest rate for a while now in 2023. Figure 1 summarizes the development of inflation in the US, EU, and the UK.
With the soaring inflation in 2021 and afterward, central banks had to react. Financial markets enjoyed rates close to zero, if not negative, for a long time. As a response, central banks started raising their interest rates. The Bank of England was the first to raise its interest rates in December 2021. The Fed followed in March 2022 and hiked its rate in every meeting and by a higher amount on average than the BoE or the ECB. The BoE did so too, but did smaller hikes on average. The ECB followed in June 2022, but they did not hike at every meeting. At the start of 2023, the interest rate in the US was already at 4.25% compared to 3.5% in the UK and 2.5% in the EU. Consequentially, the ECB hiked more in 2023 but did not reach the same heights as in the US or UK, which are currently at 5.25%, while the ECB’s interest rate remains at 4.5%. With interest rates now higher than inflation rates in each of those economies, most market participants expect interest rate cuts in 2024, especially due to an elevated possibility of a recession ahead.