A slow and deliberate pivot
The Federal Reserve has entered a delicate phase of policy normalization. After nearly three years of aggressive tightening—lifting the federal funds rate from near zero in early 2022 to over 5.25%—the central bank faces a dual challenge: keeping inflation anchored without triggering a broader slowdown. With core inflation trending near 2.8% as of October 2025, the Fed’s credibility hinges on maintaining its disinflation trajectory while avoiding a policy-induced recession.
Data table: Key inflation and growth indicators
| Metric | 2023 | 2024 | 2025 (YTD) |
|---|---|---|---|
| CPI (YoY %) | 6.4 | 3.2 | 2.7 |
| Core PCE (YoY %) | 4.7 | 3.1 | 2.8 |
| Real GDP Growth (%) | 2.5 | 2.0 | 1.8 |
| Unemployment Rate (%) | 3.6 | 3.8 | 4.1 |
Sources: U.S. Bureau of Economic Analysis (BEA), Bureau of Labor Statistics (BLS), Federal Reserve.
The new risk: policy lag and credit contraction
The effects of past rate hikes are still filtering through the economy. Small business credit costs have doubled since 2021, and delinquencies on commercial real estate loans have risen sharply. Bank lending standards tightened in 2024, particularly for medium-sized firms, reducing capital spending plans across sectors.
Corporate caution and household fatigue
Consumer spending remains resilient but uneven. Higher-income households continue to drive discretionary spending, while lower-income groups face mounting credit card debt—now exceeding $1.3 trillion. The housing market, sensitive to mortgage rates near 7%, has slowed dramatically, reducing wealth effects.
Leadership implications
Executives should prepare for an extended period of tight credit and moderate demand. Strategic capital allocation—favoring productivity investments and automation over expansion—is critical. Firms with variable-rate debt should prioritize refinancing or deleveraging ahead of potential rate cuts in 2026.