Our economic outlook for the United States

Tariff developments hold the potential to present the Federal Reserve with a “dual-mandate” challenge. The Fed’s congressional mandate is to ensure both price stability and maximum sustainable employment. The Fed manages the two sides of that mandate by setting an appropriate target for the federal funds rate, the rate at which commercial banks lend money to each other overnight. We expect that, as long as the labor market remains healthy, the Fed will place greater emphasis on inflation and avoid cutting interest rates. The Fed’s preferred inflation measure hasn’t yet fallen to its 2% target, and the imposition of tariffs threatens to send inflation higher. Vanguard anticipates two Fed rate cuts in the second half of 2025, which would leave the policy rate at year-end in a range of 3.75%–4%. That’s 25 to 50 basis points higher than a majority of market participants are pricing in for year-end. (A basis point is one-hundredth of a percentage point.) The Fed left its federal funds rate target unchanged in a range of 4.25%­–4.5% on March 19. The Fed’s next policy announcement is scheduled for Wednesday, May 7.

The U.S. labor market produced 228,000 jobs in March, well above expectations, and the unemployment rate nudged higher on a rounded basis from 4.1% to 4.2%, remaining in the narrow range it has occupied for a year. We recently increased our year-end forecast for the unemployment rate from around 4.5% to around 5%. Forward-looking indicators suggest a market that is poised to weaken, with pockets of the market increasingly vulnerable to shocks. We expect that federal government job reductions will be a persistent but gradual headwind in the coming months.