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Federal Reserve Chair Jerome Powell presented the central bank鈥檚 semiannual Monetary Policy Report to Congress on Tuesday, emphasizing progress toward maximum employment and stable prices while acknowledging remaining challenges. He noted that the economy remains strong, with GDP growing 2.5% in 2024, driven by consumer spending. The labor market has cooled but remains solid, with job growth stabilizing and wage pressures easing. Inflation has moderated significantly, with core personal consumption expenditures index (PCE), the Fed's favorite measure, at 2.8%, though still above the Fed鈥檚 2% target for headline price rises.

On monetary policy, Powell emphasized that the Fed has lowered rates by a full percentage point since last September while continuing to shrink its balance sheet. With policy now less restrictive, he stressed that there鈥檚 no urgency to adjust rates further, as moving too fast could stall inflation progress, while moving too slowly could weaken growth.

But while the Fed will remain data dependent before making further changes, we expect inflation to ease in the months ahead, opening the door to additional rate cuts.

Inflation has come down significantly from its peak. While core PCE鈥攚hich excludes volatile food and energy prices鈥攔emains at 2.8%, still above the level that would be consistent with the Fed鈥檚 2% target for headline inflation, the trend remains favorable, reflecting the impact of tighter monetary policy and easing supply constraints. Ahead of Wednesday鈥檚 consumer price index (CPI) release, we think core CPI may be relatively high month over month but still low enough for inflation to slow slightly on an annual basis. Additionally, we believe shelter inflation, a key contributor to elevated price pressures, is expected to moderate further, which should help headline inflation move closer to the Fed鈥檚 target. With inflation expectations remaining stable, the Fed has room to maintain policy flexibility.

The labor market remains resilient. As reflected in January's labor report, unemployment ticked down to 4% from 4.1% in December, and wage growth accelerated, though job gains slowed. Payrolls rose 143,000 last month, below estimates of 175,000, but the two prior months were revised higher and the three-month average still remains solid at 237,000. While hiring has moderated, wage growth is still trending at a healthy pace, keeping consumer spending supported without reigniting inflation pressures. 鈥� The recent dynamic keeps the labor market in line with the Fed鈥檚 dual mandate鈥攅nsuring strength in employment while allowing inflation to continue its downward path.

Tariffs are a headwind but shouldn't derail growth. Aggressive US tariffs would likely trigger retaliation by US trading partners, and there are risks of a tit-for-tat ratcheting up of tariffs. Policy uncertainty is unusually high, which is damaging to global growth since it is difficult for businesses and consumers to make plans. And the effect of a prolonged retaliatory exchange of tariffs is stagflationary鈥攎eaning that prices would experience a one-off increase, and we estimate expected growth would slow 80-100 basis points. But while Trump will adopt an aggressive stance on tariffs, we believe he is unlikely to take actions that would rekindle inflation, prompt Fed rate hikes, and negatively impact financial markets. During Fed Chair Powell鈥檚 testimony on Tuesday, he reiterated the Fed鈥檚 longstanding support for free trade, but avoided addressing Trump鈥檚 tariff鈥檚 policies, emphasizing that those decisions are a matter for elected officials. Against this backdrop, our base case assigns a 50% probability of 鈥済rowth despite tariffs,鈥� assuming US economic growth of around 2.0% this year.

So, with a stable US labor market, inflation moderating, and GDP growth remaining steady, we see an attractive environment for risk assets, particularly as the Fed moves toward further policy easing. We believe the risk-reward profile for equities remains attractive with 9% upside potential for US stocks over the remainder of 2025, driven by resilient economic growth, AI advancement, and gradually falling yields. Our year-end forecast for the S&P 500 is 6,600 in our base case. We also view the outlook for high-quality fixed income like investment grade corporate bonds as positive and expect the 10-year Treasury yield to fall to 4.0% by the end of 2025.