Chicago panel split on road ahead in 2025

The Fed may have two more rate cuts in store this year, there is a floor forming under the Treasury bond market, a short recession is a possibility, and fire-struck Los Angeles is the “wild card” in 2025, according to panelists at the Executives’ Club of Chicago’s Annual Economic Outlook event. 

The panel, which took place in Chicago’s Loop Tuesday, featured sobering forecasts from KPMG Chief Economist Diane Swonk and Ariel Investments Chairman and Co-CEO John Rogers, Jr., with a more upbeat outlook from former Deutsche Asset Management Vice Chairman Dr. Bob Froehlich, who advised the audience to turn off the news and quit worrying. 

“We are seeing a floor form under the Treasury bond market, and that is due to the fact that we’re issuing a lot of debt,” Swonk said. “There are concerns about inflation and tariffs. And we also have central banks no longer buying Treasury bonds like they once did, including the Federal Reserve. And all of that has put upward pressure.”

Swonk also lamented the decoupling of consumer confidence from economic data. Explaining Americans’ sour mood on the economy, she pointed to decades of rising inequality and inflation. Specifically, she cited the displacement of workers and economic shocks like the pandemic and the 2008 financial crisis, which “added insult to injury.” As a daughter of the Detroit area, she said, she has seen firsthand the effects of jobs moving offshore.

“Now we’ve got a lot of policy changes coming, the level of inflation is still high and the Fed’s battle against inflation is not yet over,” she said. “Policy is still technically in restrictive territory, and whatever the Fed doesn’t do, the bond market will clearly do for it.”

During Trump’s first term, “we could still withstand tariffs and things like that without it tripping inflation,” she added. “Now, supply chains… are longer and more vulnerable to external shocks than they once were.”

Swonk warned the room that it no longer matters what the precise causes of skyrocketing prices actually were: “Inflation is seen as a result of two things: government mismanagement and corporate greed.”

But Americans were not reassured by Trump’s victory: the consumer confidence index fell in December, and the University of Michigan’s consumer sentiment index also plunged in December and early January. People are buying ahead of price hikes, including from potential tariffs, Swonk said, which could create a self-fulfilling prophecy. 

“The challenge is ensuring that as we try to right the ship for those who were hardest-hit by inflation … they are the most at risk of being hit by tariffs and curbs on immigration,” she said. “Tariffs are a regressive tax, they hit low- and middle-income households harder. They do protect industries, but they never deliver the investment in those industries to offset the pain they induce in consumers.”

Executives’ Club of Chicago

Bitcoin has surged since the election, possibly elevated by Elon Musk, who is bullish on cryptocurrencies. Rogers, who last year called it “rat poison,” issued a mea culpa of sorts.

“I was completely wrong” about bitcoin, “so I was kind of hoping I wouldn’t be invited back,” joked the longtime Annual Economic Outlook panelist.

Froehlich believes the economic story of the upcoming year will be “lower and slower” interest rates and inflation. He said he expects to see robust earnings in the new year, deregulation and corporate tax cuts. 

Onshoring of inventory will benefit small companies, he said, as will lower inflation and lower interest rates. And as for bitcoin?

“I don’t bet on sports, and I don’t bet on fake currencies,” Froehlich said.

The panelists shared what keeps them up at night; for Swonk, it’s the “strain on resources of rebuilding” Los Angeles. “L.A. is the big wild card this year,” she said. “The number of billion-dollar climate events has been rising, adjusted for inflation.”

Rogers said the potential breakdown in the structure of the North Atlantic Treaty Organization poses nuclear risks.

Froehlich downplayed fears of mass deportations, saying “I believe it’s going to be muted.” His main concern: the first year of a new administration is never an ideal time to invest. 

On nuclear risks of a different nature, Swonk noted that Microsoft is trying to revive Three Mile Island, site of the worst nuclear accident in U.S. history, to use all the power it generates, and other tech companies at the forefront of artificial intelligence are pursuing nuclear power, as well. 

“We are stressing the energy grid in an extraordinary way,” she warned.

Other insights included that it would take a 60% jump in income to bring housing affordability back to 2019 levels, that materials costs will continue to rise and that the USMCA trade agreement with Mexico and Canada comes up for renegotiation in 2026. If it sunsets, that could have far-reaching costs for U.S. consumers.

Still, Rogers said that while he is pessimistic about the market today, he remains optimistic long-term.

“Our capitalist democracy is the best system ever invented, and we find a way to get back on track no matter what the challenges this great country faces,” Rogers said.