Commercial Insights

2025 midyear economic outlook: Seeking opportunities amid uncertainty

Examining the prospects for the economy, inflation, interest rates, and the markets.

The U.S. economy has had unexpected volatility in 2025 fueled by major policy changes, including those regarding trade and immigration. Despite the turbulence, continued economic growth is anticipated. “There’s been a lot of volatility in the economy. There’s been a lot of volatility in the market. I think that ultimately, we're going to get to where we thought we were going, it’s just the path by which we get there is going to be different than we would have expected at the start of the year,” Regions Chief Economist Richard Moody said recently.

He was speaking at one of the economic outlook events Regions has been hosting across the bank’s footprint. In the last week of June, Nikki Stephenson, head of Commercial Banking, hosted a panel including Moody, Brian Herron, director of Fixed Income Portfolio Management, and Elizabeth Taylor, head of Government Affairs and Economic Development. They spoke with an audience of Commercial Banking and Wealth Management clients to share detailed analysis and answer the questions on their minds.

“We understand the questions in the environment we are operating in: It’s inflation, it’s interest rates, it’s tariffs, fiscal policy, and now geopolitical uncertainty,” Stephenson said, referring to an escalation in the Israel-Iran conflict.

Outlook for the economy

While there has been unexpected volatility so far in 2025, the long-term economic trajectory is expected to come back into alignment with initial forecasts.

“When we came into the year, we were expecting two things,” Moody said. “One, the economy would slow down toward a more trend-like rate of growth after the prior two years, which had been significantly faster than what we believe to be the economy’s long-term trend. The second thing we expected was action on policy fronts: fiscal policy, trade policy, immigration policy and regulatory policy.”

The reality was a bit different than pictured. “We’ve gotten changes in policies, some proposed, some in the works, some already implemented. The changes were, let’s just say, a bit more drastic in some areas than we had anticipated, and it really has impacted how businesses and consumers have been behaving this year. There’s still a lot of uncertainty about trade policy. … Immigration policy we think is impacting the labor market.”

Despite bumps in the road, the long-term economic trajectory is expected to align with initial forecasts.

“Layers of uncertainty” in the markets

Following a strong start to the year, the stock market hit a downturn with the announcement of proposed tariffs in April. However, markets quickly recovered once the tariffs were paused. With the economic data likely to remain somewhat volatile amid an uncertain outlook for trade policy, we could continue to see sharp swings.

There’s a similar situation in the bond market. “I think you could characterize it as we have layers of uncertainty. Each one of those layers has been added, and we've got to deal with them in some way for investors and money managers to figure out what direction to move forward,” said Herron.

“It wasn't that long ago that we were myopically focused on the Fed and whether or not they were going to pull off this soft landing. … Since then, we have pivoted to the tariffs, policy uncertainty, geopolitical stress. And we can't forget our constant favorite of debt and deficit. … Even the Fed is on the sidelines at this point. So again, if you feel overwhelmed, you’re not alone on this,” Herron said.

“With all these crosscurrents we're talking about, the bond market [U.S. Bloomberg Aggregate Bond Index] is still up around 3.5 percent. That's really good when compared with a few years ago, where we had large downturns in the market. Also, if you have a balanced portfolio, the bond market is doing what you want; it's offsetting the volatility in the riskier parts of your portfolio.”

Bond market outlook

As we move through the remainder of this year, Herron said bond market investors can expect some ups and downs.

“We’re forecasting a bit of a softish landing. There’s some volatility going on, but we’re not estimating a hard right into inflation or a hard left into a recession. That's pretty good for a bond investor … with the extra yield, you're offsetting any volatility that might be in that market.”

However, Herron cautions that anything that pushes up rates, including inflation, is a risk. “If inflation proves to be sticky or is not under control by the Fed, then we're going to see the back end of the yield curve continue to go up, and inflation has not been checked as ‘mission accomplished’ by the Fed yet.”

The path of interest rates

“The Fed has a dual mandate. They are tasked with focusing on full employment and also price stability, which they define as inflation of 2% annually,” Moody said. “The full employment side of their mandate is not being threatened right now. … They are much more focused right now on the inflation side of their mandate.” Caution regarding inflation could mean the next rate cut may be a few months away.

“What would get them to move sooner would be if the labor market were to start deteriorating more rapidly than they were anticipating. Short of that, it’s hard for me to see them cutting the funds rate again before September,” he said.

The impact of tariffs also has to be factored in. “Anything that happens to restrict global trade flows is going to result in less foreign capital flowing into the states, and that could be a source of upward pressure on interest rates.”

Tariffs and inflation

The changes in trade policy are still a moving target. “We're certainly watching what plays out with the tariffs. … I think the sticking point is going to be China and how the administration figures out how to come to terms with China while also still being tough on China,” Taylor said.

“There are certain competitive issues with that that are difficult to navigate, but we will see. We know that the president is very serious about tariffs. You hear the administration touting the revenue they're bringing in from tariffs as a positive. So, some of those things do seem to indicate more durability of tariff rates being higher than what we expected. We’re certainly optimistic that the administration can make some more progress on trade deals,” she said.

When it comes to inflation, the impact of tariffs on consumer prices also has layers of complexity. “When people heard tariffs were going up, they automatically expected prices to go up by the same amount,” Moody said. “We never thought that would be the case. We thought it would be a more gradual effect, and there are a number of reasons for that.”

The first reason is that businesses planned ahead. “In the first quarter, businesses were very aggressive in pulling orders forward, particularly import orders, to avoid higher tariffs,” Moody said.

The second is that companies are hesitant to raise prices amid tariff uncertainty. “There is a certain amount of fatigue in the household sector against further price increases. Corporations are very cognizant of that.”

One more factor is corporate profit margins. “Profit margins in the corporate sector are higher than they have historically been. Now, they're off the peaks that we saw back in early 2022, but they're still significantly above historical norms. So that means corporations have had the latitude to absorb these initial increases in tariffs.”

Then there is the ripple effect of services prices. “The last few months, services prices have started to increase at a much slower rate. The way that an economist would say this is, we're seeing faster services price disinflation. So, at the same time we expect goods prices will start rising at a faster rate, services prices will be rising at a much slower rate. In terms of the overall measures of inflation, it's not going to be as harsh as what you might think if you're only focused on goods prices.”

Upside and downside risks

For the economy and the markets, the list of downside risks is a bit longer than the list of upside risks, Moody said. “Obviously, a re-escalation of global trade tensions that puts us closer to what we heard on April 2 would be a meaningful downside risk for the economy and the markets.”

“You also can't rule out geopolitical events. What we were watching most closely … is whether or not Iran would take steps to disrupt global shipping channels, particularly the Strait of Hormuz. That is something that would cause a significant disruption in supply chains and something that would lead to slower growth and higher inflation pretty quickly,” said Moody.

“Something we always talk about with geopolitical risks: they don't announce when they're coming. They just suddenly pop up. So, I can ’t discount that. Also, I think if the bond market reacts negatively to [the One Big Beautiful Bill Act] that is something that could push longer-term rates higher than we are now forecasting. I will say that our forecasts of 10-year yields and mortgage rates are higher than consensus forecasts because of the factors I touched on.”

However, there are upside risks to note. “Obviously, there are some pockets of stress among lower-income households, but on the whole, household financial conditions and household balance sheets remain in excellent condition. Household net worth—the ratio of net worth to after-tax income—is at historical highs right now,” he said.

“There's also a lot of liquidity in the corporate sector. … We think a lot of corporations are kind of sitting on their heels awaiting clarity on the policy front. Once we do get clarity, particularly on the trade front and the fiscal policy front, we think a lot of that capital in the corporate sector could come off the sidelines. It could lead to more business investment spending than we are now anticipating, which would be supportive of the labor market.”

Staying resilient

With a wide range of outcomes and two-way risks, it’s important to maintain your perspective.

“This is exactly the time that you need to lean into the great team that you have at Regions. Stay patient and let your asset allocation work for you over the long term,” Herron said.

Stephenson emphasized that investors don’t have to face these changes alone. “We stand at the ready to partner with our clients as we sort through the volatility, as we sort through the uncertainty, to help you make the best decisions for your business.”

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