Oxford Economics' Ryan Sweet Discusses US Economy and Federal Reserve Strategy for 2025

In the latest U.S. economic data released on February 12, the Consumer Price Index (CPI) for January increased by 0.5% month-over-month, with the annual inflation rate reaching 3%, both exceeding market expectations. Core CPI, which excludes food and energy prices, rose 0.4% on a monthly basis and 3.3% year-over-year, also surpassing forecasts. 

The CPI report triggered significant market reactions, with Dow Jones Industrial Average futures dropping more than 400 points and U.S. Treasury yields rising sharply. Market expectations for Federal Reserve policy also shifted, as interest rate futures indicated that the Fed may delay rate cuts until September, with only one rate cut expected for the year. 

Against this macroeconomic backdrop, uncertainty remains over the Fed’s policy trajectory, particularly amid evolving trade policies and concerns about economic growth. The Trump administration’s plans to implement broader import tariffs could have far-reaching implications for global supply chains, price levels, and investor confidence. While Trump urged the Fed to cut rates before the CPI release, the persistence of inflation may prompt a more cautious approach to policy adjustments.

In this episode of Wall Street Frontline, we spoke with Ryan Sweet, Chief U.S. Economist at Oxford Economics, for an in-depth analysis of the global economic outlook for 2025, the impact of inflation trends on Fed policy, and the long-term economic risks posed by trade tensions and immigration policies. He also shared insights on the role of artificial intelligence (AI) in boosting productivity growth, the effects of interest rate policy on the housing market, and expectations for Fed rate cuts in 2026. Below is the full interview.

Wall Street Frontline: How do you assess the global economic growth outlook for 2025? What are the primary drivers of growth, and what risks could lead to an economic slowdown?

Ryan Sweet: Overall, 2025 is expected to be another solid but unspectacular year for the global economy, which remains highly polarized. There is a distinct divide between economies that are performing well and those facing significant challenges. On one end, the U.S. economy continues to demonstrate resilience, with projected growth between 2.5% and 3%, supported by stable productivity gains and robust consumer spending.

Conversely, other regions are under considerable pressure and lack strong growth catalysts. The Chinese economy exhibited stronger-than-expected performance in the fourth quarter of 2024, maintaining some momentum into 2025. However, its growth remains heavily dependent on net exports, leaving it highly susceptible to disruptions from global trade tensions—an issue that appears to be intensifying, particularly driven by U.S. policy. Meanwhile, Europe remains stagnant, lacking a significant economic driver to steer it out of its current sluggish phase.

Wall Street Frontline: Regarding the U.S. economy, January's Consumer Price Index (CPI) increased by a seasonally adjusted 0.5%, with annual inflation reaching 3%, both exceeding expectations. This suggests inflationary pressures may be more persistent than previously anticipated. Do you believe this is a temporary fluctuation due to seasonal factors, or does it indicate a broader trend?

Ryan Sweet: I believe this is a temporary fluctuation. The January CPI report closely mirrored the pattern observed in January 2024, which reflects significant seasonal effects in U.S. inflation. Many businesses tend to adjust prices at the beginning of the year, leading to upward pressure on CPI during the first quarter.

For instance, in the restaurant industry, prices for menu items such as cheeseburgers do not increase on a weekly or even monthly basis. Instead, price adjustments typically occur annually, often in January through March. While the latest inflation figures were disappointing, they do not necessarily indicate a renewed surge in inflation, even when accounting for potential tariff impacts.

Moreover, CPI is only one measure of inflation. The Federal Reserve’s preferred metric, the Personal Consumption Expenditures (PCE) Price Index, is expected to present a slightly more favorable reading. From the Fed’s perspective, this report is unlikely to trigger immediate concerns about inflation spiraling out of control.

Wall Street Frontline: Fed Chair Jerome Powell recently stated that there is no immediate need to adjust interest rates. What does this suggest about the Federal Reserve’s broader strategy for 2025? How many rate cuts do you anticipate for the year?

Ryan Sweet: Powell's statement reinforces the Fed’s cautious stance, indicating that policymakers are comfortable maintaining their current position. The central bank is unlikely to overreact to isolated inflation or employment reports, instead focusing on longer-term trends.

The lingering effects of past inflation remain a concern for the Fed, making it reluctant to preemptively cut rates and risk a resurgence of inflation. Given the added uncertainty surrounding tariffs, immigration policy, and fiscal measures, the Fed may prefer to maintain the current rate environment unless there are clear signs of economic deterioration.

As a result, our outlook includes only one rate cut in December. However, in 2026, as the inflationary effects of tariffs gradually dissipate, the Fed is expected to take a more aggressive approach to normalizing rates.

Wall Street Frontline: Could you elaborate on your expectations for rate cuts in 2026?

Ryan Sweet: The U.S. is not immune to the effects of tariffs, but I believe some projections of their inflationary impact are overstated. Various factors will offset these effects, including exchange rate adjustments, consumer substitution toward non-tariffed goods, and businesses absorbing some of the cost increases rather than fully passing them on to consumers.

While the labor market remains relatively strong, underlying vulnerabilities exist. By 2026, as inflation trends closer to the Fed’s target following the tariff-induced spike, policymakers will shift their focus toward sustaining labor market stability. Our expectation is that the Fed will implement rate cuts at every other meeting in 2026, totaling a 100-basis-point reduction.

Wall Street Frontline: So according to Oxford Economics, a total of 100 basis points in rate cuts are expected in 2026?

Ryan Sweet: Correct. Essentially, the rate cuts that do not occur in 2025 will be deferred to 2026. Prior to the recent tariff announcements, the general consensus among economists and market analysts was for two to three rate cuts in 2025. Given the current conditions, these reductions will likely be postponed until the following year.

Wall Street Frontline: If expectations for rate cuts are pushed back into late 2025 or 2026, which sectors are most vulnerable to prolonged higher interest rates?

Ryan Sweet: The housing sector is the most sensitive to interest rates.

The key factor is not solely the Fed’s actions but also movements in long-term interest rates. Since the Fed began cutting rates in September, the yield on 10-year Treasury bonds has risen by approximately 100 basis points, exerting upward pressure on 30-year fixed mortgage rates.

While demand remains strong—supported by favorable demographic trends—concerns lie on the construction side. The pipeline of authorized but unstarted housing projects remains substantial for both single-family and multi-family units. However, if interest rates remain elevated for an extended period, coupled with potential tariffs on building materials imported from Canada and Mexico, project cancellations may increase, significantly impacting residential investment, particularly in early 2025.

Wall Street Frontline: If the Trump administration imposes stricter immigration policies, labor shortages could drive up wages and overall business costs. What is your assessment of the labor market, considering recent jobless claims data?

Ryan Sweet: The labor market remains in relatively strong condition. Trend job growth is steady at approximately 175,000 to 200,000 per month—sufficient to maintain the unemployment rate around 4%.

However, a potential labor supply issue could arise if immigration is significantly restricted. Over the past several years, the expansion of the U.S. labor force has been largely driven by foreign-born workers. Immigration has played a critical role in filling millions of job vacancies, with approximately 7 to 8 million open positions currently.

Our estimates suggest that net annual immigration could decline from the typical 1.1 million to around 800,000 over the next few years. While mass deportations are unlikely due to legal and financial constraints, tighter immigration policies will impact multiple sectors, particularly food processing, construction, and agriculture.

Wall Street Frontline: Are there any recent research highlights from Oxford Economics that investors should be aware of? What key trends or risks are you monitoring that could impact financial markets in the coming months?

Ryan Sweet: Tariffs remain a primary concern. We have developed multiple scenarios assessing the potential impact of broad-based tariffs on Canada, Mexico, and the European Union. If the Trump administration follows through on its tariff threats, various downside risks could materialize.

Additionally, we are closely monitoring fiscal policy developments in the U.S., potential stimulus measures in China, and budgetary policies in the U.K. There are numerous moving parts that could influence global markets, and these remain top priorities for economists and investors alike.

Wall Street Frontline: Regarding tariffs, which country do you believe will be most affected by U.S. trade policies?

Ryan Sweet: Unlike the previous Trump administration, which primarily targeted China, the current approach appears to extend to any country with a trade surplus against the U.S. Initial focus has been on Canada, Mexico, and China. Tariff measures are expected to be more widespread, with new levies anticipated on imports from the European Union, South Korea, Mexico, Canada, and Japan.

Wall Street Frontline: Given that trade restrictions and immigration policies could drive inflation, why do you believe inflation will not resurge?

Ryan Sweet: Inflationary pressures will persist but remain manageable. While immigration policies impact wages over the long term, productivity growth serves as a key counterbalance.

Regarding tariffs, their inflationary effects are expected to be incremental rather than dramatic. The Trump administration has expressed a commitment to affordability, which may constrain excessive price increases. Overall, we do not anticipate a repeat of the inflationary surges seen in the 1970s and 1980s.

Wall Street Frontline: You mentioned productivity growth. What are the key drivers behind it?

Ryan Sweet: The U.S. trend productivity growth rate is approximately 2%. A tight labor market incentivizes businesses to invest in labor-saving technologies, particularly in equipment and software. Investments in intellectual property are also expected to contribute to productivity gains in 2025 and 2026.

By 2027 or 2028, artificial intelligence could provide an additional boost to productivity growth. The long-term outlook remains optimistic.