Economic Outlook for the Second Half of 2025

Despite a tumultuous start to the year, Payden & Rygel’s economics team remains cautiously optimistic about the U.S. economy. Their mid-year macro outlook report forecasts continued growth, moderating inflation, and a potential resume of interest rate cuts by the Federal Reserve before the end of the year.

Recent Market Developments

Earlier in the year, markets experienced significant volatility following an unexpected round of tariffs in April and growing fears of a recession. However, with inflation cooling down and job growth holding steady, Payden & Rygel believes there is room for a softer landing than what many headlines suggest.

Expert Insights

According to Jeffrey Cleveland, Chief Economist at Payden & Rygel, "Markets overreacted to the April tariff shock, but we believe the data still supports rate cuts and steady growth. If inflation continues to cool, or unemployment rises modestly, we expect the Fed to act." This perspective offers a more positive outlook on the economy than what is currently being reported.

Key Insights for the Second Half of 2025

Several key points are highlighted in the report:

• Inflation Can Still Moderate: Core Personal Consumption Expenditures (PCE) inflation has slowed down significantly. Despite tariff risks, disinflation remains on track.
• No Recession, No Re-acceleration: Payden & Rygel expects sub-trend GDP growth but sees both recession and re-acceleration risks as overstated.
• Labor Market Easing, Not Collapsing: Downside risks to job growth will outweigh the upside pressure from the shrinking labor force, leading to a gradual rise in the unemployment rate.
• Cuts Are Still on The Table: Payden & Rygel forecasts up to 75 basis points in cuts by year-end, which is more than the current market pricing.
• Rates Lower Across the Curve: Fiscal concerns are already priced in. With inflation moderating and the Fed cutting, 10-year yields can still decline.
• Dollar Weakness Likely, But the Trade Is Crowded: The greenback may remain soft with the Fed leading rate cuts, though Payden & Rygel warns that the short-dollar trade is crowded.

Report Overview and Update

The report also evaluates Payden & Rygel’s original 2025 forecast, issued in December 2024, and provides a measured update considering the year’s volatility. It concludes that moderating inflation with continued growth is a scenario underpriced in markets and underappreciated among policymakers.

About Payden & Rygel

With $160 billion under management, Payden & Rygel is one of the largest privately-owned global investment advisers focused on the active management of fixed income and equity portfolios. They provide a full range of investment strategies and solutions to investors around the globe.

Conclusion

In conclusion, despite the initial turbulence in the first half of 2025, Payden & Rygel’s economic outlook for the second half of the year suggests a positive trajectory for the U.S. economy. With forecasts of continued growth, moderate inflation, and potential interest rate cuts, the firm offers a cautiously optimistic view. This outlook is crucial for investors and policymakers, as it suggests that the economy may experience a softer landing than anticipated, with potential for steady growth and manageable inflation.