Key highlights:

• Higher tariffs and uncertainty mean lower growth and higher (near-term) inflation. We do not expect the tariff shock to lead to persistently higher inflation and expect the FOMC can ease from July.
• While the US economy has slowed, a surge in imports and measurement quirks mean that the small decline in Q1 GDP overstates how abruptly momentum shifted at the turn of the year.
• We continue to see US growth slowing to just 0.6% over 2025, as core PCE inflation spikes to around 4%. Exceptional policy uncertainty leaves error bands unusually wide.
• The Fed will respond cautiously to lower activity growth and a (limited) increase in the unemployment rate as it leans against the risk that higher inflation becomes entrenched. We expect the FOMC will start cutting in July, seeing 75bp of cuts by year-end and terminal of 3.0-3.25% in mid-2026.
• A sharper rise in the unemployment rate would leave the Fed further from their full employment mandate and less concerned inflation will persist, leading to a more aggressive easing. In contrast, ongoing labour market resilience would leave them on hold for longer.

Find out more in NAB’s US Economic Update (May 2025)