Economic Overview:

In the first quarter of 2025, the Fed maintained a cautious stance, adopting a wait-and-see approach and keeping short-term interest rates relatively unchanged. These rates have remained elevated compared to recent years, with the Fed indicating that any future adjustments will be driven by developments in inflation and job reports in the months ahead.

Meanwhile, long-term interest rates have been a bit more volatile but have generally trended downward over the past quarter. This reflects the bond market’s response to mixed economic signals, juggling unexpectedly high inflation data against signs of a potential slowdown in medium- to long-term economic growth. U.S. GDP growth slowed to an annualized rate of 1.6% last quarter, driven by weakening consumer demand and cautious corporate spending—both of which are often considered early indicators of a possible recession.

Overall, the first quarter of 2025 demonstrated the ongoing balancing act between curbing inflation and supporting sustainable economic growth. Short-term rates remained elevated, while long-term rates reflected a more cautious market outlook. To mirror the Fed's continued stance, we’ll have to wait and see what Q2 has in store for us.

Market Projections:

No one truly knows where interest rates are headed. I could tell you they’re going up—or down—and there’s a good chance I’d be wrong either way. So instead of speculating, I thought I’d rely on current market projections to provide a potential outlook across the short-, medium-, and long-term:

Near Term (2025–2026):
Long-term borrowing rates are expected to stay fairly close to current levels, due to continued elevated short-term rates and ongoing inflation concerns. That said, if inflationary pressures subside and economic momentum slows, we could see some stabilization—or even a slight decline—by late 2025.

Medium Term (2027–2030):
Assuming inflation continues to moderate and economic growth stabilizes, long-term rates may gradually decline, creating a more favorable environment for financing. However, this outlook could shift quickly if the global economy faces unexpected disruptions, such as another financial crisis or renewed supply chain shocks, which could introduce renewed volatility.

Long Term (Beyond 2030):
Long-term borrowing rates could normalize as the Fed moves closer to its inflation targets and economic conditions become more predictable, although this may be very hard to envision at this moment in time.

While the exact trajectory of long-term borrowing costs depends on a wide range of variables, the general expectation these higher rates are potentially here to stay for the foreseeable future. Still, there's room for cautious optimism that a gradual easing may emerge as inflation pressures recede and growth steadies.

Read the Q1 Interest Rate Analysis.