While the American Bankers Association’s Economic Advisory Committee expects continued economic growth, the committee’s latest forecast released today recognizes risks emanating from policy changes and uncertainty. Additionally, the Federal Reserve is likely to face significant challenges in returning inflation to its 2% target, according to the group.
The committee, composed of 16 chief economists from some of North America’s largest banks, expects real economic growth at 2.1% for both 2025 and 2026, but with growing downside risks in 2025. The group also expects a deceleration in government purchases. This, along with changes in trade policy, poses downside risk to consumer spending and capital expenditures. Committee members expect the federal government budget deficit to increase to $1.9 trillion in FY 2025 and to eclipse the $2 trillion mark in 2026. The committee sees recession risks at 30% both in 2025 and 2026, but there is consensus that risk could rise depending on the path of policy.
“The consensus forecast for positive economic growth and low recession risk is based on the expectation that new tariffs won’t stay in place for all of 2025,” said Luke Tilley, committee chair and chief economist at M&T Bank/Wilmington Trust. “The longer the tariffs stay on, the more the risk of recession grows. In addition, elevated housing costs continue to present headwinds for consumers and the broader economy despite a recent slowdown in both home price appreciation and rental rate growth.”
While the bank economists had some concerns about the labor market when the committee last met in September 2024, the group expects the unemployment rate to increase only slightly from the current rate of 4.1% to 4.2% by the end of 2025.
“Job growth has remained solid in recent months, but risks to the employment outlook are to the downside,” Tilley said.
The ABA committee expects inflation to continue to run above the Fed’s 2% target. The group’s forecast is that personal consumption expenditures, the Fed’s preferred inflation indicator, will be 2.5% in 2025 and 2.4% in 2026.
Despite persistent inflation, the committee expects the Fed to become slightly less restrictive over the next few quarters. While the current effective federal funds rate sits at 4.65%, the committee expects about two 25 basis point cuts in both 2025 and 2026.
With minimal rate cuts over the next six months and continuing inflation, the committee expects a deterioration in consumer credit quality as consumers remain financially stretched. However, the forecast anticipates bank consumer delinquency rates to rise only slightly to just under 3% in 2025, up from 2.75% in Q4 2024.
The committee expects minimal changes to mortgage rates and modest home price appreciation. The bank economists anticipate mortgage rates will average 6.9% in 2025 and 6.5% in 2026 as the Federal Reserve remains in a restrictive stance. House price appreciation is expected to be 3.7% in 2025 and 3.4% in 2026.
