Traders have adjusted their expectations for Federal Reserve monetary policy following the Atlanta Federal Reserve’s GDPNow model update on March 3, 2025, which estimated a -2.8% annualized real GDP growth rate for the first quarter of 2025. This marked a significant downgrade from the previous estimate of -1.5% on February 28 and an even sharper decline from the +2.3% forecast on February 19. The shift in expectations reflects growing concerns about an economic slowdown, prompting markets to anticipate a more aggressive Federal Reserve response to stimulate growth.
Money markets, as tracked by tools like the CME Group’s FedWatch, have moved to fully price in three quarter-point interest rate cuts by the end of 2025, which would lower the federal funds rate from its current range of 4.25%–4.5% to approximately 3.5%–3.75%. This shift in pricing, which emerged for the first time since mid-December 2024, was partly driven by fears of an economic contraction, exacerbated by policy uncertainties, including the imposition of new U.S. tariffs on major trading partners like Canada, Mexico, and China.
These tariffs, implemented by the President Donald Trump administration, have raised concerns about potential disruptions to global supply chains, increased inflationary pressures, and a broader dampening of economic growth, often referred to as a “Trumpcession.” The Fed’s own December 2024 projections anticipated only two rate cuts in 2025, and recent economic data, such as a strong December 2024 jobs report adding 256,000 jobs, have raised doubts about the need for aggressive easing, particularly if inflation remains sticky, as suggested by a University of Michigan survey showing consumer inflation expectations rising to 3.3%.
The Atlanta Fed’s GDPNow model, while not an official forecast, is a widely watched nowcast that uses incoming economic data to estimate GDP growth in real time. The sharp downgrade was attributed to weaker-than-expected consumer spending, a record-high U.S. trade deficit of $153 billion in January, and declining manufacturing activity, as reported by the Census Bureau and the Institute for Supply Management. These indicators, combined with a drop in consumer confidence—evidenced by The Conference Board’s index falling from 105.3 to 98.3 points in February, the largest monthly decline since August 2021—have heightened recession fears.
Critically, however, the expectation of three rate cuts must be viewed with caution. The GDPNow model is volatile, especially early in the quarter, and its estimates can change significantly as more data becomes available. Historically, the model’s final forecasts have had an average absolute error of 0.77 percentage points, indicating it is not infallible. Moreover, the Federal Reserve’s actual policy decisions are data-dependent and made meeting by meeting, meaning long-term market pricing is speculative and subject to revision.
Furthermore, the narrative of tariffs as a primary driver of economic slowdown, while plausible, requires scrutiny. Tariffs may indeed reduce growth by increasing costs and disrupting trade, but some economists, such as those at Deutsche Bank, argue they are more likely to fuel inflation than cause a recession, potentially limiting the Fed’s ability to cut rates as aggressively as markets expect.
The steepening of the U.S. Treasury yield curve, with two-year yields dropping six basis points to 3.89% following the tariff announcements, reflects market expectations of rate cuts, but the inversion of parts of the yield curve, such as the two-year and five-year spread briefly turning negative, has historically preceded economic contractions, not guaranteed them.
Traders have priced in three Federal Reserve rate cuts for 2025 in response to the Atlanta Fed’s -2.8% GDP growth estimate for Q1 and broader economic concerns, including tariffs and weakening consumer indicators. However, this pricing reflects market sentiment rather than a guaranteed outcome, as economic data, Fed policy, and geopolitical developments could alter the trajectory. The establishment narrative of an impending slowdown requiring significant monetary easing should be critically examined, as alternative scenarios—such as persistent inflation or a more resilient economy—could lead to fewer or no rate cuts, challenging current market expectations.
