Our forecast has not materially changed in this update, although our confidence in it has improved. The data have moved roughly in line with our expectations in the past month, demonstrating a slowdown in underlying domestic demand and hiring figures to support it.
Trade has been the tail that wagged the dog in the first half of the year, and with trade policy still in flux, volatility isn't going anywhere. That said, the most massive swings in trade are likely behind us, and we expect underlying economic growth to slow further from here.
The July jobs report brought with it material revisions that shaved over 250K jobs off of employment growth in the prior two months. While surprising, it provides some support to why we've seen a choosier consumer in recent months.
Households have cut back on discretionary services spending and purchases of discretionary goods have been met with an air pocket after an initial pull-forward ahead of the first major round of tariffs.
We have not changed our expectations for Fed easing. We still expect the FOMC to lower the federal funds rate by 25 bps at each of the remaining meetings this year in September, October and December. The target range for the federal funds rate would finish the year at 3.50%-3.75%. With downside risks to the Fed's employment mandate and upside risks to inflation, we think the Committee will move monetary policy toward a more neutral stance.
The pivot to a more decidedly downbeat assessment in the economic data is the top-of-the-fold headline in August, but fiscal policy is set to be a tailwind for economic activity at the start of next year. That, in tandem with a less restrictive monetary policy backdrop, ought to be supportive of an acceleration in real GDP in 2026.
