Monthly Interest Rate Update
Despite a strong rebound in third-quarter GDP growth (4.3%), the U.S. economy in 2025 showed signs of a narrowing and uneven expansion. Growth was driven largely by higher-income consumer spending and government outlays, while labor markets weakened, job creation slowed sharply, and consumer confidence fell to decade lows. Inflation eased closer to the Fed’s target, allowing interest rates to decline and the yield curve to steepen—a trend expected to continue as policymakers prioritize employment amid subdued growth prospects heading into 2026.
2025 finished on a delayed positive note, as reported 3Q GDP rose 4.3%. The Bureau of Economic Analysis’ initial estimate of third quarter GDP growth, delayed since October 30 due to the Federal government shutdown, came in above consensus forecasts. It follows on the heels of 3.8% expansion in the second quarter and negative results (-0.6%) in the first quarter. Year over year, GDP is up to a more modest 2.4%. The growth was driven primarily by higher consumer spending, especially in services, as well as higher government spending. Fourth quarter numbers are expected to be substantially lower (in the 1.5% range) because of the shutdown.
However, the labor market took on an increasingly downbeat tone throughout 2025, while consumer confidence fell to its lowest in more than a decade. Job creation has slowed substantially, with only 610,000 net new jobs added for the first 11 months of the year. We’re likely to remain below 1 million for the full year. This is the worst annual result since the deeply negative numbers of 2020. Similarly, the unemployment rate moved up to 4.6%—not a serious concern yet but still the highest since September of 2021.
November inflation (CPI) fell to 2.7%, above the Federal Reserve’s target but in line with year-end 2024.
Interest rates fell across the curve in 2025, with shorter term rates declining faster than long-term rates. Two-year Treasury yields were down 77 bp last year on the strength of three Fed rate cuts, while the benchmark 10-year yield fell 40 basis points for the year. The spread between the two has been rising steadily since mid-2023, when it bottomed out at negative 106 bp.
The economic expansion has been narrowing this year and seems to be getting narrower:
- On the consumer front, much of the spending has been concentrated among upper income households. This is likely to be exacerbated by the surge in insurance premiums for people on the Affordable Care Act exchanges, as medical expenditures have been a key driver of spending growth.
- In manufacturing, the strong third quarter GDP data came despite shrinkage in capital investment. Meanwhile, the Institute of Supply Management’s manufacturing index moved into contractionary territory in December. Only 11% of industries surveyed reported growth last month, down from 22% in November, 33% in October and 39% a year ago. With investments concentrated in AI-fueled data centers, there’s concern about how long this sector can carry the economy on its own.
- The promise of reshoring manufacturing jobs with high tariffs hasn’t translated into more employment so far, in part because so much of this work has already been automated. And if AI does help to improve productivity as forecast, even fewer workers will be needed.
The upshot of a narrow, jobless expansion is a steeper yield curve, with lower short-term rates and higher long-term rates. We’ve seen a 176 bp steepening of the curve since 2023, a trend that’s set to continue into 2026. If labor markets continue to be weak and inflation stays near the Fed’s 2.0% target, policymakers will have room to cut short-term rates faster in support of their employment mandate. This is an approach Trump’s appointee to replace Fed Chair Powell in May is expected to favor in any case. And if GDP growth outperforms in 2026 in line with market expectations, the long end should rise, moving the 2-10 spread 100 bp, a level consistent with prior economic expansions.
Key Statistics: Interest Rates, Unemployment and Inflation
| Year-end 2021 | Year-end 2022 | Year-end 2023 | Year-end 2024 | December 31, 2025 | |
|---|---|---|---|---|---|
| 10-yr Treasury yield | 1.51% | 3.87% | 3.88% | 4.57% | 4.17% |
| 2-yr Treasury yield | 0.73% | 4.43% | 4.25% | 4.24% | 3.47% |
| Spread | 0.78% | -0.56% |
-0.37% | 0.33% | 0.70% |
| Fed Funds Target (mid) | 0.125% | 4.375% |
5.375% | 4.375% | 3.625% |
| CME Term SOFR 1-mo | 0.055% | 4.36% | 5.35% | 4.33% | 3.69% |
| CPI (y/y change) | 7.0% | 6.5% | 3.1% | 2.7% | 2.7% |
| Core PCE (monthly) | 4.1% | 4.7% | 3.16% | 2.81% | 2.83% |
| 5-yr TIPS (market breakeven) | 2.91% | 2.38% | 2.15% | 2.39% | 2.27% |
| U-3 Unemployment | 3.9% | 3.5% | 3.7% | 4.2% | 4.6% |
| Real avg weekly earnings | 4.7% | -3.1% | 0.5% | 1.0% | 0.8% |
| Annual change in NFP jobs | +6,451,000 | +4,503,000 | +2,560,000 | +1,450,000 |
+930,000 |
2025 Benchmark Interest Rate Trends
- SOFR (yellow dotted line) followed the Fed Funds target (white) down.
- Treasury yields declined as well, with the spread between 2- and 10-year yields widening in 4Q25.
Flattening job growth takes a toll on consumer confidence:
Total Non-Farm Payrolls
Source: Bureau of Labor Statistics, Bloomberg Finance LP
Conference Board Consumer Confidence
Source: Conference Board, Bloomberg Finance LP
- With net payroll growth slowing to a crawl, consumer confidence is bumping against 10-year lows.
Steepening Yield Curve: 10y minus 2y US Treasury Yields
Source: Bloomberg Finance LP
Source: Bureau of Economic Analysis, Bloomberg Finance LP
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All rates shown are indications only and subject to change.
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