S&P Forecasts Persistent but Mild Economic Slump (Slow-Motion Slowdown) in US; Fed Signals Rate Cuts

Thursday, 26 June 2025: Satyam Panday, Chief US and Canada Economist at S&P Global Ratings, has predicted a steady but mild slowdown for the US economy, terming it a “slow-motion slowdown”. The GDP growth rate is expected to decelerate significantly through 2025, projected to grow around 1.1% by the end of the year, compared to 2.5% in the previous year.

However, this is more of an economic cooling period, and S&P did not predict any economic recession. However, the risk of recessing has increased to 30–35%, notably higher than the historical average of 13–15%. In the meantime, the Fed may opt for more cautious rate cuts (1–2 cuts, 25 bp each) later this year.

Expected Indian Market Reactions on a Possible Rate Cut

If the Fed announces rate cuts, the yields on US treasuries will reduce, thereby making Indian equities and bond markets potentially more attractive. FII inflows may support equity and bond markets, and the Indian Rupee may strengthen against USD, albeit slightly. The overall cost of global capital would reduce, which may boost capital expansion in India.

Key Pressures: Tariffs, Rates, and Domestic Demand

Panday identified multiple factors contributing to the slowdown, including:

• Elevated interest rates
• Upcoming higher tariffs
• Weakening domestic demand

He explained that while consumers have not yet felt the full impact of rising costs due to businesses’ pre-tariff inventory stockpiling, this buffer is expected to erode soon. Once those inventories are exhausted, companies may have no choice but to pass on higher costs to consumers, eroding purchasing power and further dampening growth.

Inflation Set to Rise, But Fed Cuts Still Likely

S&P expects core inflation to rise to 3.0% and 3.5% in the second half of 2025. However, Panday believes the US Federal Reserve will likely look past this temporary uptick, focusing instead on a softening labor market.

In line with this view, the Fed is anticipated to cut interest rates by 125 basis points over the next 18 months-50 basis points by year-end and another 75 basis points in 2026.

Policy Prioritisation Expected to Shift

Panday emphasised that the Fed might prioritise employment stability over temporary inflation concerns, signalling a potential policy shift in response to the evolving macroeconomic environment.

This projection comes amid broader uncertainties, including geopolitical risks and trade disruptions, which continue to cloud the global economic outlook.

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