Here’s what Richmond Fed chief forecasts for 2025 economy

The economic forecast for 2025 is sunny, with a high chance of business optimism, according to Federal Reserve Bank of Richmond President and CEO Tom Barkin, who spoke Thursday during the virtual 2025 Financial Forecast held by the Virginia Bankers Association and the Virginia Chamber of Commerce.

“I went back this morning and looked at the speech I gave to this group in January 2022,” he said, “and of course, at the time, we talked about high inflation, we talked about supply chain challenges. I managed to skip over all the things I got wrong, but one thing I got right was that I said, ‘Don’t forget that after the last pandemic, 1918, we had the Roaring ’20s.’”

Barkin is a 2024 member of the Fed’s policy-making Federal Open Market Committee. The committee membership will change to its 2025 composition at its first regularly scheduled meeting of the year, which will begin Jan. 28.

In its December meeting, the FOMC voted to cut the Fed’s benchmark borrowing rate to a range of 4.25% to 4.5%. Despite that cut, the FOMC reduced its predicted rate cuts in 2025 from the four predicted in September to two in its December meeting.

“You’ve got a strong but choosier consumer, coupled with a better-valued, more productive workforce — that’s landed the economy in a good place,” Barkin said Thursday. “As a consequence, the FOMC has recalibrated the federal funds rate down 100 basis points to 4.3%.”

However, “inflation is not yet back at target,” he added, “so we still have more work to do, but we don’t think we need to be nearly as restrictive as we once were to finish the job.”

The U.S. economy is strong according to the data, Barkin said, with most estimates putting the country’s 2024 GDP growth in the 2.7% range. The U.S. had a 4.2% unemployment rate in November 2024, according to data from the U.S. Bureau of Labor Statistics.

The annual headline inflation rate as measured by the Personal Consumption Expenditures price index — a U.S. Commerce Department measure of consumer spending on goods and services among households — was 2.4% in November 2024. The Fed’s target inflation rate is 2%, as measured by the annual change in the PCE index.

The economy’s strength, Barkin said, is largely due to four factors: consumer strength; labor market resilience; increased price sensitivity; and surging productivity.

Because employers remember the post-pandemic labor shortage, they’re slow to reduce staff, Barkin said, and the layoff rate remains near historic lows.

“The environment we’ve got in the labor market is a low hiring environment, but it’s also a low firing environment, and a low-hiring, low-firing labor market is still a healthy one,” he said.

Consumers are helping slow inflation as they become more price conscious, Barkin said. As consumers push back on high prices, price-setters are realizing they’re less able to continue raising prices.

Increased productivity seems to explain why inflation is coming down although the economy has strong growth, as well as why the U.S. economy is growing despite slowing job gains, Barkin said.

“Everyone wants to quickly jump to AI [as the explanation], and perhaps that will be the case in time, but I believe the more likely story is the recent experience we’ve just been through,” as firms became more automated and efficient during the labor shortage.

Also, slowed turnover means workers are more experienced in their roles, and therefore able to get more done, Barkin noted.

Economic uncertainty has dropped some, Barkin said, and financial, deal and equity markets seem to be benefiting. Businesses are feeling optimistic.

“There’s a sense of relief to be past the election and to have clarity on the direction of travel, particularly for sectors confident they will benefit from anticipated changes,” he said, but uncertainty lingers around what policies the incoming presidential administration will implement and how.

For example, President-elect Donald Trump has said his administration will impose a 25% tariff on imports from Canada and Mexico. But specifics aren’t known, Barkin pointed out, like what tariff rates will actually be imposed, on what countries, on which products, for how long or their effects.

In the FOMC’s December 2024 meeting, Fed staff predicted that inflation would remain about the same in 2025 because of Trump’s proposed tariffs, meeting minutes released Wednesday show.

On Wednesday, CNN reported that Trump is considering declaring a national economic emergency that would allow him to construct a new tariff program using the International Economic Emergency Powers Act.

Looking to this year, “with business optimism jumping so much and labor supply unlikely to continue to grow so robustly, it feels like the current labor market[‘s] low-hiring, low-firing equilibrium is more likely to break toward more hiring than toward more firing, though of course, that’s going to differ by sector,” Barkin said.

Despite the uncertainty around new economic policy, Barkin said, “With what we know today, I expect more upside than downside in terms of growth, and I think that’s why you see so much business optimism.”

Barkin sees more risk from inflation than from policy. If wage and product costs are pressured, price-setters might pass those costs along to consumers.

All in all, Barkin said, “I do expect the story for the coming year to be more about supply and demand — and perhaps geopolitics — than monetary policy.”

The financial forecast event was originally scheduled as an in-person event at the Greater Richmond Convention Center, but organizers pivoted to a virtual event due to Richmond’s ongoing water crisis.