The Atlanta Fed expects the US economy to shrink in the first quarter, and the Fed is expected to cut interest rates three times this year.

According to the latest forecast from the Atlanta Federal Reserve, the US economy may shrink in the first quarter of 2025. The GDPNow model data from the bank shows that the Gross Domestic Product (GDP) is expected to shrink by 1.5% from January to March, a significant downward revision from previous forecasts. This adjustment is mainly due to consumer spending being lower than expected and weak exports. The model had previously projected GDP growth of 2.3% for this quarter before the release of consumer spending data on Friday. However, due to the impact of severe weather in January on consumer activity, coupled with weak exports, the forecast was significantly revised downward. Although the GDPNow model is subject to significant volatility and typically becomes more accurate later in the quarter, this trend is consistent with other economic data, indicating that the US economic growth is under pressure. "Although real-time forecast data from GDPNow fluctuates greatly, this latest data is still concerning," said Mohamed El-Erian, Chief Economic Adviser of Allianz Group and Dean of Queen's College, University of Cambridge, on social media platform X. In early February this year, the forecast model briefly predicted GDP growth of 3.9%, but as more economic data was revealed, the forecast continued to decline. Data released by the US Department of Commerce on Friday showed that personal consumption expenditures (PCE) in January fell by 0.2%, far below the market's expected growth of 0.1%. Adjusted for inflation, real consumer spending fell by 0.5%, directly leading to a 1 percentage point cut in GDP growth forecasts to 1.3%. Additionally, net exports contributed to GDP have also dropped significantly from -0.41 percentage points to -3.7 percentage points, further dragging down economic growth. This reflects weak global demand and pressure on US exports. Meanwhile, the decline in consumer confidence index, as well as concerns about rising inflation pressures, have also heightened market uncertainty. Another report from the Department of Commerce showed that the Fed's favored inflation indicator, the core personal consumption expenditures (PCE) price index, fell to 2.6% in January, down 0.3 percentage points from December last year, easing market concerns about high inflation to some extent. Labor market data released this week also raise concerns. The number of initial claims for unemployment benefits in the United States hit a new high since last October, indicating that the labor market may be cooling down. At the same time, the US bond market is also signaling an economic slowdown. The yield on 3-month US Treasury bills exceeded the yield on 10-year Treasury bonds this week, resulting in an inverted yield curve, which is typically seen as a reliable indicator that the economy may enter a recession in the next 12 to 18 months. The uncertainty in the economy and policies has led to a turbulent start for the stock market in 2025. Although the Dow Jones Industrial Average has risen by 2% since the beginning of the year, the market has experienced significant fluctuations due to changes in economic data and policy expectations. Joseph Brusuelas, Chief Economist of RSM US, warned, "The market's excessive optimism is about to be shattered by reality." As economic data deteriorates, the market is increasingly confident that the Federal Reserve will take rate cutting measures to stabilize the economy. Data from the federal funds rate futures market shows that the probability of a 25 basis point rate cut in June has risen to 80%, and it is expected that rates will be lowered three times throughout the year.