Global Economy Set To Accelerate In 2025 Amid Uncertainty Over Tariffs, U.S. Money Markets, And Fed Rate Cuts
Birgul COTELLI, Ph. D.
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The global economy is poised for acceleration in 2025, fueled by recovering activity and robust growth projections.
However, the path forward remains fraught with challenges, as higher tariffs and geopolitical tensions threaten to undermine progress, according to the OECD.
Meanwhile, U.S. money market funds, currently at record levels, face uncertain dynamics as investors adapt to shifting conditions.
Adding to the complexity, the Federal Reserve is expected to cut interest rates in December, raising questions about the broader implications for markets and economic stability.
There is a mixed outlook for global growth and financial markets, indicating the need for agility in navigating an evolving economic landscape.
World Economy To Accelerate In 2025, But Recovery Threatened By Higher Tariffs, OECD Says
The global economy is projected to grow at a slightly faster pace in 2025, with inflation cooling and key markets showing resilience, according to the latest report by the OECD - OCDE . The Paris-based body now forecasts a global growth rate of 3.3% for next year, up from the 3.2% estimated for 2024. This optimistic outlook is buoyed by strong momentum in the U.S., where growth is expected to climb to 2.4% in 2025, a significant revision from the previously anticipated 1.6%.
However, the OECD - OCDE’s projections come with caveats, notably the potential economic drag of escalating trade tensions and wide budget deficits. OECD Chief Economist Alvaro Santos Pereira cautioned that higher tariffs, especially under the proposed policies of U.S. President-elect Donald Trump, could weaken global growth and drive up consumer prices.
Key Risks: Trade Tensions and Budget Deficits
The OECD report underscores that robust growth hinges on stable trade policies, a condition that appears uncertain. Higher tariffs could exacerbate global trade frictions, especially as major economies like the U.S. and China navigate policy shifts. Pereira warned of the dangers of protectionism, stating that it could derail the recovery from both the pandemic-induced economic slump and the inflation surge.
Wide fiscal deficits in countries such as the U.S. and France also pose a challenge. Despite efforts by some governments to rein in spending—such as France’s contentious package of tax hikes and budget cuts—investor concerns persist. Rising debt levels and fiscal imbalances could undermine long-term economic stability.
Mixed Regional Outlook
While the OECD raised its growth forecasts for India and China, it noted challenges for the latter, particularly in the real estate sector. India remains a “shining light” for global growth, supported by strong exports and structural reforms. By contrast, Germany’s growth projection for 2025 has been downgraded to 0.7%, reflecting structural weaknesses, including inadequate digital infrastructure.
In the U.K., recent fiscal reforms and a revised budget prompted the OECD to revise its growth forecast upward to 1.7% for 2025. The report also highlighted the importance of structural reforms in Europe’s major economies to address lagging productivity and competitiveness.
Central Banks and the Inflation Outlook
As inflation cools further, the OECD expects central banks to gradually lower interest rates. The Federal Reserve’s key rate is projected to decline to between 3.25% and 3.5% by early 2026, while the European Central Bank is expected to reduce its rate to 2% by the end of 2025. However, Pereira emphasized the need for a cautious approach to ensure price stability, particularly for services.
Looking Ahead
While the OECD’s latest report offers optimism for global growth, it also highlights significant risks that could hinder progress. Policymakers will need to strike a delicate balance between fostering economic recovery and addressing vulnerabilities, including trade disruptions, fiscal imbalances, and structural inefficiencies. As the world enters a pivotal period, maintaining fiscal discipline and prioritizing investment in infrastructure and innovation will be crucial to sustaining growth in an uncertain global landscape.
What Now For Record U.S. Money Market Funds?
U.S. money market funds have continued their remarkable growth trajectory, defying expectations of a slowdown following the Federal Reserve Board 's (Fed) first interest rate cuts in September. Over the past two years, these funds have repeatedly set records, with holdings now estimated at $6.65 trillion—and some sources suggesting they may have surpassed the $7 trillion mark.
Despite recent monetary policy shifts, including rate cuts aimed at bolstering economic activity, money market funds have remained a favored destination for investors seeking stability in volatile markets. Inflows have grown by an additional $40 billion since September, underscoring their enduring appeal.
Why Are Money Market Funds So Resilient?
Several factors contribute to the sustained growth of money market funds, even in a lower interest rate environment:
Implications for Fixed Income Markets
The ongoing inflows into money market funds signal a broader trend of risk aversion, particularly in fixed income markets. With yields on longer-dated bonds remaining relatively low, investors are opting for the flexibility and security that money market instruments provide. This trend could exert downward pressure on short-term rates while dampening demand for riskier assets.
Outlook: Stability Amid Uncertainty
The sustained momentum in money market fund inflows suggests that these vehicles will continue to play a critical role in investor portfolios, at least in the short term. Unless the Fed embarks on a more aggressive rate-cutting cycle or a significant macroeconomic shift occurs, the status quo is unlikely to change.
For now, money market funds remain a safe haven for investors seeking stability and liquidity in a landscape marked by uncertainty. Their growth trajectory not only reflects prevailing market conditions but also their enduring relevance in modern portfolio management.
Amid the interplay of Fed policy, political developments, and market dynamics, money market funds are poised to remain a cornerstone of cautious investment strategies
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The Fed Is On Course To Cut Interest Rates In December, But What Happens Next Is Anyone’s Guess
As the Federal Reserve Board approaches its December policy meeting, the central bank finds itself at a crossroads, balancing robust economic growth against persistent inflationary pressures. A strong November jobs report has bolstered expectations of another interest rate cut, but the broader implications of such a move remain contentious among economists and market observers.
A Rate Cut Likely—But Is It Warranted?
November’s nonfarm payrolls data revealed an increase of 227,000 jobs, well above expectations and a sharp rebound from October’s strike-impacted figures. The unemployment rate ticked up slightly to 4.2%, but overall, the labor market continues to show resilience, with payrolls avoiding a single monthly decline since December 2020.
Despite this strength, inflation has inched higher, with the Fed’s preferred measure at 2.3%—and even higher at 2.8% when excluding food and energy. Wage growth remains robust at 4%, well above pre-pandemic levels, adding to concerns that inflationary pressures might persist.
Against this backdrop, economists are divided on whether the Fed’s anticipated December rate cut is appropriate. Joseph A. LaVorgna, chief economist at SMBC Nikko Securities Inc., argues that financial conditions are already too loose and warns of a potential speculative bubble if rates are cut further. Others, such as Jason Furman, a former White House economist, caution against complacency on inflation, noting that wage growth is more consistent with a 3.5% inflation rate than the Fed’s 2% target.
The Fed’s Balancing Act
Fed Chair Jerome Powell and his colleagues face a delicate balancing act. While policymakers have noted the importance of controlling inflation, they are also increasingly focused on supporting the labor market and fostering economic growth. This dual mandate has led to an evolving strategy that seeks to recalibrate policy without overcorrecting.
Cleveland Fed President Beth Hammack echoed this sentiment, suggesting that the Fed may be nearing the point where it should slow the pace of rate reductions. If the December cut is implemented, it would represent a full percentage point reduction since September.
Economic Momentum vs. Fiscal Uncertainty
The U.S. economy continues to outperform expectations, with fourth-quarter GDP growth projected at an annualized 3.3%. This resilience has earned praise from Powell, who recently described the U.S. as "the envy of the developed world." However, questions remain about the sustainability of this momentum, particularly in light of looming fiscal and trade policy uncertainties.
President-elect Donald Trump’s return to office raises concerns about potential inflationary pressures from renewed tariffs and expansive fiscal policies. Meanwhile, the Fed’s efforts to determine a "neutral" rate—one that neither restricts nor stimulates growth—could complicate its decision-making process in 2025.
Market Implications
Markets have largely priced in the December rate cut, with a CME Group gauge indicating a 90% probability. However, traders are bracing for a potential pause in January, followed by cautious rate adjustments in early 2025. The Fed’s next moves will hinge on incoming data, particularly on inflation and employment, as it seeks to strike a balance between normalizing monetary policy and avoiding undue economic disruptions.
What’s Next?
As the Fed enters its quiet period ahead of the December meeting, attention will turn to key inflation metrics set for release next week. These reports could provide the final data points needed to solidify the Fed’s decision. Regardless of the immediate outcome, the broader question remains: How far can the central bank go in cutting rates without undermining its inflation-fighting credibility?
For now, Powell and his team appear committed to a cautious approach, aiming to navigate the complex interplay of growth, inflation, and market stability in an uncertain economic landscape.
A Mixed Outlook for the Economy and Markets
The global economy is poised for moderate acceleration in 2025, with the OECD projecting a growth rate of 3.3%. This recovery is supported by cooling inflation, resilient labor markets, and improving activity across major economies. However, the outlook remains uncertain as persistent risks, including escalating tariffs, fiscal imbalances, and geopolitical tensions, could undermine progress. The OECD's warnings about the adverse effects of protectionist policies and widening budget deficits highlight the fragile foundation of the anticipated recovery.
In the U.S., robust growth and resilient job creation contrast with inflationary pressures and fiscal uncertainty, particularly as President-elect Donald Trump’s trade and fiscal policies loom. The Federal Reserve is set to cut interest rates in December, with markets largely pricing in the move. However, debates persist over the necessity of further easing amid concerns about inflation and the potential for speculative bubbles.
On the investment front, U.S. money market funds continue to attract inflows, reflecting heightened risk aversion and a preference for liquidity. These funds remain a cornerstone of cautious strategies, offering stability in a volatile environment. Their resilience underlines the broader uncertainty in financial markets as investors weigh shifting monetary policies and economic dynamics.
Overall, the global and U.S. economies enter 2025 with a mix of optimism and caution. Policymakers face the dual challenge of fostering growth while mitigating risks, requiring agile responses to evolving conditions. As markets and economies navigate this complex landscape, a careful balance of fiscal discipline, monetary prudence, and structural reform will be critical to sustaining long-term stability and growth.
Federal Reserve Board OECD - OCDE European Central Bank DWS Group MSN SMBC Nikko Securities Inc. CME Group Federal Reserve Bank of Cleveland
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