Investment banks have increased the likelihood of a recession occurring in 2025, suggesting that the Federal Reserve may need to lower interest rates below the neutral level of 3% if this scenario unfolds.

Consumer sentiment has taken a hit, with the University of Michigan's Consumer Sentiment Index dropping to 50.8 in April, marking the lowest level since June 2022, which reflects growing pessimism and rising inflation expectations among consumers.

Inflation expectations have surged, with one-year and five-year forecasts reaching 6.7% and 4.4%, respectively, largely driven by the impact of tariffs, complicating the Federal Reserve's monetary policy decisions.

While there has been a temporary pause in tariffs, the ongoing 145% tariff on Chinese imports is anticipated to negatively affect profit margins and consumer spending, contributing to overall economic uncertainty.

The job market is also showing signs of strain, as March 2025 recorded a staggering 275,240 layoffs, with significant job losses in the retail sector and federal employment reductions.

Adding to the economic concerns, the NFIB business index has fallen to 97.4, a level historically associated with recessions, indicating a decline in business confidence.

Despite these challenges, Fed Chair Powell has indicated a cautious approach to interest rate cuts, opting to wait for more definitive economic data even as signs of a slowdown and negative GDP growth become apparent.

The Atlanta Fed's forecast for Q1 GDP growth indicates a contraction of -2.4%, which raises the likelihood of a recession if negative growth continues for another quarter.

Although there was a significant stock market surge on April 9, 2025, following the lifting of tariff uncertainty—with the DJIA rising by 7.9%, Nasdaq by 12.2%, and S&P 500 by 9.5%—equity indexes remain negative for the month and year to date due to ongoing economic concerns.

The ISM Services Index also dropped to 50.8 in March, signaling minimal expansion and raising further concerns about future economic performance.

Falling interest rates could lead to rising bond prices; however, potential selling of U.S. Treasury securities by China presents risks for interest rates and overall economic stability.