Prediction markets are watching economic growth – or turbulence – more closely than ever, as heightened uncertainty stems from policy decisions under the new Trump administration, ongoing global trade competition, and tariffs that turned from threats to reality.
Gross Domestic Product (GDP), the Consumer Price Index (CPI), the unemployment rate, and other key indicators move in tandem with the Federal Reserve’s interest rate decisions, rippling across commercial real estate, credit card rates, and beyond. These metrics don’t just reflect past economic performance, they also set the tone and momentum for the months ahead.
“Changes in the federal funds rate influence other interest rates that in turn influence borrowing costs for households and businesses as well as broader financial conditions,” the Fed states.
Here’s a deeper look at what prediction markets are forecasting for the month of February, along with some additional context if you want to make your on February predictions.
GDP
Fourth-quarter GDP for 2024, released last week, came in at 2.3%, slightly below expectations, as the majority of traders on Kalshi bet on a figure above 2.5%. Despite strong holiday retail numbers, persistently high interest rates and a lack of clear guidance on potential cuts slowed growth in the final months of the year.
On a year-over-year basis, GDP expanded by 2.8%, a slight decline from 2.9% in 2023. The stronger growth seen in mid-2024 led some economists to argue that the late-year deceleration doesn’t necessarily indicate a weaker outlook ahead.
Kalshi traders are bullish on Q1 2025 GDP, with over 50% betting on a growth rate exceeding 2.5%, outpacing last quarter’s figures.
“Overall, this (Q4 result) was a decent GDP report that shows the U.S. economic expansion is still on a pretty firm footing right now,” Scott Anderson, chief U.S. economist at BMO Capital Markets, wrote in a commentary.
The case for above 3%: A rebound in trade volume could drive GDP growth higher in the first quarter of 2025. If supply chain bottlenecks ease and global demand remains resilient, the economy may outperform expectations, leading to renewed investor confidence.
The case for below 3% (above 2.5%): On the other hand, continued geopolitical tensions and tightening financial conditions could further suppress trade activity, dragging down GDP growth. If inflationary pressures persist, the Fed may hesitate to cut rates, stifling expansion.
My pick: Above 2.5%. While uncertainties persist, a modest GDP rebound seems plausible, contingent on stabilizing trade dynamics. A rate cut by mid-2025 could serve as a catalyst for stronger economic activity.
CPI and Inflation Measures
Inflation remains central to the Fed’s calculus, with year-over-year CPI readings fluctuating between 2.7% and 3.0%, a relatively stable range compared to the volatility of recent years.
Core CPI, which excludes food and energy, increased by 0.3% month-over-month and 3.3% year-over-year. The Fed relies on these figures to gauge price stability and determine the course of interest rates.
The year-end uptick in inflation was partly driven by base effects from the prior year, particularly in the energy sector.
Looking ahead, the Federal Reserve Bank of Cleveland’s inflation “nowcast” currently projects January CPI at 2.85% year-over-year, aligning closely with Kalshi traders, 50% of whom expect a CPI reading above 2.9%.
The case for above 2.9%: A strong labor market and persistent consumer demand could keep price pressures elevated. If wages continue to rise and supply-side disruptions persist, CPI could push beyond 2.9%.
The case for below 2.9% (above 2.8%): Conversely, declining energy prices and easing supply chain constraints could keep inflation in check. If businesses absorb cost pressures and pass fewer price increases to consumers, CPI could remain below 2.9%.
My pick: A CPI reading slightly above 2.9% seems likely, given the resilience of consumer spending and wage growth.
Unemployment Rate
The U.S. labor market ended 2024 on a strong note, with nonfarm payrolls increasing by 256,000 in December, surpassing expectations. The unemployment rate edged down to 4.1% from 4.2% in November, indicating a resilient job market.
Employment gains were notable in health care, government, and social assistance sectors. Retail trade also added jobs in December, rebounding from a decline in November.
Despite these positive developments, the labor force participation rate remained unchanged at 62.5%, suggesting that a segment of the population is still not engaged in the labor market.
Economists are closely monitoring these trends, as sustained job growth and a stable unemployment rate could influence the Federal Reserve’s monetary policy decisions in the coming months. A robust labor market may lead the Fed to maintain current interest rates to prevent the economy from overheating.
Elyse Ausenbaugh, Head of Investment Strategy at J.P. Morgan Wealth Management, noted, “The jobs report underscored that this is a strong economy that doesn’t currently need meaningful additional policy easing to see its expansion persist.”
Economists polled by the Wall Street Journal estimated about 175,000 jobs being added in January, down from a 256,000 increase in December.
Softer data in the upcoming report could renew discussions about potential rate cuts by the Federal Reserve, which investors are already anticipating. At the moment, over 55% participants on Kalshi believe the unemployment rate in January will be above 4.1%.
The case for above 4.1%: A slowdown in hiring, particularly in tech and finance, could push the unemployment rate above 4.1%. If businesses delay expansion plans due to economic uncertainty, job growth could falter, leading to concerns about a weakening labor market.
The case for below 4.1% (above 4.0%): Strong consumer demand and continued hiring in healthcare and government sectors could keep unemployment below 4.1%. If wage growth remains steady and labor force participation holds, the job market could sustain its current strength.
My pick: The unemployment rate is likely to hover around 4.1%, with a slight risk of ticking higher. While overall job growth remains healthy, sector-specific slowdowns could nudge the rate slightly above this key level.
Rate Cuts for 2025
As of January 2025, the Fed has maintained the federal funds rate at 4.25%-4.50%, pausing its previous rate-cut cycle. Last week’s decision reflects a cautious stance amid fresh economic challenges, including new tariffs imposed by the Trump administration on imports from Canada, Mexico, and China, which are expected to put upward pressure on inflation.
Fed Chair Jerome Powell reinforced the importance of monitoring inflation before making additional moves. “We see things as (being) in a really good place for (Fed) policy and for the economy,” he said at a Jan. 29 press conference. However, he reiterated the need for vigilance. Despite the encouraging signs, the Fed is still looking for further inflation progress.
Economists remain split on the rate trajectory. Fed Governor Michelle Bowman voiced concerns over inflation risks, advocating for a gradual approach, while Chicago Fed President Austan Goolsbee, known for his dovish stance, told CNBC that inflation is under control and urged further rate cuts to support growth.
Markets are parsing these signals carefully. Kalshi bettors currently see two rate cuts as the most likely scenario for 2025, with 26% backing that expectation.
The case for more than two rate cuts: If economic growth slows significantly and inflation continues to moderate, the Fed may opt for more aggressive cuts. Lower borrowing costs could stimulate corporate investment and consumer spending, preventing a potential downturn.
The case for one or fewer rate cuts: Persistent inflation or stronger-than-expected labor market data could keep the Fed on hold or limit it to a single cut. If the economy shows resilience without additional easing, the Fed may delay further rate reductions to maintain financial stability.
My pick: Two rate cuts seem likely, as the Fed balances growth concerns with inflation risks. However, a more aggressive stance remains on the table if economic conditions deteriorate faster than expected.
