U.S. Economy Contracts Sharply in Q1 2025: Key Factors and Implications
The U.S. economy contracted at an annualized rate of 0.5 percent in the first quarter of 2025, according to the third estimate (BEA).
Jerome Powell
The Federal Reserve maintained the federal funds rate at 4.25%-4.5% during its March 2025 meeting, continuing the pause in its rate-cut cycle that started in January, in line with expectations.
Policymakers acknowledged rising uncertainty in the economic outlook but reaffirmed their plan to lower rates by approximately 50 basis points this year, consistent with December projections.
Meanwhile, GDP growth forecasts for 2025 were revised down to 1.7% from the previous 2.1% estimate.
Growth projections for 2026 and 2027 were also lowered to 1.8% (from 2%) and 1.8% (from 1.9%), respectively.
In contrast, PCE inflation expectations were revised upward for 2025 (2.7% vs. 2.5%) and 2026 (2.2% vs. 2.1%), while the 2027 forecast remained at 2%.
The unemployment rate is now expected to reach 4.4% in 2025 (up from 4.3%), but projections for 2026 and 2027 remain unchanged at 4.3%.
Additionally, the Fed announced plans to slow the reduction of its securities holdings, lowering the redemption cap on Treasury securities from $25 billion to $5 billion starting in April.
Source: Federal Reserve
