The US economy rebounded more strongly than anticipated in the second quarter of 2025, growing at a 3% annualised rate according to data from the Bureau of Economic Analysis, making the prospect of Federal Reserve interest rate cuts even more remote as policymakers grapple with persistent inflation concerns.
The growth figure significantly exceeded economists’ predictions of 2.4% annualised GDP growth, as polled by Reuters, and marked a sharp reversal from the surprise 0.5% contraction in the first quarter. That earlier decline had been driven by a surge in imports as businesses rushed to stockpile foreign goods ahead of the Trump administration’s tariff implementations.
The stronger-than-expected performance reinforces the Federal Reserve’s cautious stance on monetary policy, with the central bank having held interest rates steady at 4.25% to 4.50% for four consecutive meetings in 2025. The robust growth data, combined with inflation that remains “somewhat elevated” according to Fed officials, suggests rate cuts may not materialise until later this year at the earliest.
Import Surge Reverses Course
The first quarter’s contraction had been primarily attributed to a dramatic increase in imports, which count as a subtraction in GDP calculations. Businesses and consumers had rushed to purchase foreign goods before new tariffs took effect, creating what economists described as a temporary distortion in the economic data.
What we’re witnessing is an economy temporarily buffered from the tariff shock by smart logistics manoeuvres, proactive pricing strategies and some foreign exporter concessions,” Greg Daco, EY-Parthenon chief economist, noted in analysis of the first quarter figures.
That import surge has now unwound, contributing to the second quarter’s stronger growth performance. Economists had correctly anticipated this reversal, with forecasts pointing to a return to positive growth as the temporary effects of pre-tariff stockpiling faded.
Fed Maintains Hawkish Stance
The Federal Reserve’s response to the growth data has been predictably cautious. At its June meeting, the Fed unanimously voted to hold rates steady whilst projecting just two quarter-point rate cuts for the remainder of 2025 – maintaining the same forecast from March despite mounting pressure from President Trump for more aggressive easing.
Fed Chair Jerome Powell has repeatedly emphasised the central bank’s data-dependent approach, stating after the June meeting: “For the time being, we are well-positioned to wait to learn more about the likely course of the economy before considering any adjustments to our policy stance.
The Fed’s updated economic projections paint a mixed picture for the year ahead. Officials now forecast GDP growth of just 1.4% for 2025, down from their previous estimate of 1.7%, whilst core inflation projections have been raised to 3.1% from 2.8% – well above the central bank’s 2% target.
Inflation Concerns Persist
The persistence of above-target inflation remains the primary obstacle to rate cuts. Core Personal Consumption Expenditures (PCE) inflation, the Fed’s preferred measure, is projected to remain elevated at 3.1% in 2025 before gradually declining to 2.4% in 2026 and reaching the 2% target only in 2027.
“It takes some time for tariffs to work their way through the chain of distribution to the end consumer,” Powell explained at the June FOMC meeting. We expect to see more impacts this year.”
The inflationary pressures from Trump administration policies – including widespread tariffs and potential workforce constraints from immigration restrictions – have created what Powell described as “unusually elevated” uncertainty about the economic outlook.
Markets Eye September
Interest rate traders currently anticipate the first rate cut of 2025 will not occur until September or October, according to market pricing. This represents a significant pushback from earlier expectations, when some had hoped for cuts as early as the spring.
The Fed is waiting on the data,” explained Rob Haworth, senior investment strategy director with U.S. Bank Asset Management Group. It started cutting rates last year based on rising unemployment and slower inflation. Until we get major data changes like that, they’ll remain extremely cautious about cutting interest rates further.
The unemployment rate, currently projected at 4.5% for 2025, remains relatively low by historical standards, giving the Fed room to maintain its patient approach despite political pressure for more accommodative policy.
Global Context
Powell has repeatedly noted that the US economy’s performance remains “remarkable” compared to other developed nations, many of which continue to struggle with slow growth and persistent inflation challenges. This relative strength provides additional justification for the Fed’s measured approach to policy normalisation.
The U.S. economy has just been remarkable,” Powell stated after the December 2024 rate decision. If you look around the world, there is a lot of slow growth and continuous struggle with inflation. So I feel very good about where the economy is.
The European Central Bank, Bank of England, and Bank of Canada have all enacted multiple rate cuts in 2025, making the Federal Reserve an outlier among major central banks in maintaining relatively restrictive monetary policy.
Outlook Remains Uncertain
Looking ahead, economists remain divided on the trajectory of US growth. Whilst the second quarter’s strong performance suggests underlying economic resilience, concerns persist about the lagged effects of high interest rates and ongoing trade policy uncertainty.
The Fed’s own projections suggest a significant slowdown ahead, with GDP growth expected to moderate to 1.4% for the full year 2025 and just 1.6% in 2026. This deceleration, combined with the gradual easing of inflationary pressures, could eventually open the door to the rate cuts markets are anticipating – but not likely before autumn.
For now, the combination of solid growth and sticky inflation leaves the Federal Reserve in a holding pattern, carefully balancing its dual mandate whilst navigating an increasingly complex economic and political landscape. The second quarter’s surprisingly strong performance only reinforces the central bank’s cautious approach, suggesting that those hoping for imminent rate relief may have to wait considerably longer than anticipated.
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