No Fed Rate Cuts in 2025? Experts Say It Could Happen
Where are interest rates headed this year? The answer could be one that was unthinkable as recently as a month ago: Nowhere. Amid mixed economic data and uncertainty around the president-elect's proposed tariffs, some analysts are now tempering expectations of multiple cuts in 2025.
In a surprising reversal, Bank of America wrote in a report this week that it now expects the Federal Reserve to keep its benchmark federal funds rate at its current range of 4.25% to 4.5% for an extended period. Previously, Bank of America forecasted two cuts of 25 basis points (a quarter of a percentage point) each in 2025.
The revision came after a couple of recent data releases showed a labor market in better shape — and inflation more stubborn — than economists anticipated. The better-than-expected December jobs report released Friday found that the economy added more than 250,000 jobs and unemployment fell to 4.1%.
On Wednesday, the consumer price index (CPI) for December was released, showing that annual inflation ticked up from 2.7% to 2.9%, which Bank of America economists characterized as "modestly above target" in a new research note. Plus, President-elect Donald Trump's suggested tariffs on countries like Mexico and China would make prices on a wide array of goods go up if enacted, economists say.
These conditions point to the Fed taking more of a wait-and-see approach. Officials said as much on Wednesday after the CPI release. John Williams, the New York Fed president and voting member of the central bank's rate-setting committee, said the economy is healthy. Williams added that the two parts of the Fed's mandate — to support the labor market and to limit inflation from going above the 2% target — have returned to balance.
"Our job is to ensure the risks remain in balance," he said in remarks at a conference in Connecticut. Inflation is still higher than policymakers want, and Williams said disinflation "will take time, and the process may well be choppy."
After the strong jobs data for December, Chris Brigati, chief investment officer at financial services company SWBC, said the Fed might hit the brakes entirely. “We may very well see no rate cuts this year,” he said in a research note.
Timeline of recent Fed cuts
The Fed raised interest rates 11 times between March 2022 and July 2023 to fight inflation, bringing rates up to a range of 5.25% to 5.5%. The Fed held interest rates at that level for over a year, announcing a 50 basis point rate cut in September. The Fed has cut rates twice more since then.
Here is the timeline of recent interest rate cuts:
- September: 50 basis point cut
- November: 25 basis point cut
- December: 25 basis point cut
At 4.25% to 4.5%, rates are now a full percentage point lower than the recent high, but it's unclear how much more cutting the Fed will do. In any event, interest rates aren't likely to return to the near-zero levels of 2019 anytime soon, if ever. This means Americans will have to get used to rates on mortgages, auto loans, personal loans, student loans and credit cards remaining higher than they were just a few years ago.
How many interest rate cuts will there be in 2025?
In December, Fed officials expected to make two rate cuts in 2025, according to the "dot plot," which shows where officials think rates are headed. However, at one point in September, Fed officials were expecting four cuts.
Since the release of the last dot plot, the odds of multiple cuts in 2025 appear to have decreased further. According to the CME Group's FedWatch Tool, the market now expects one rate cut by June, but the probability of an additional rate cut beyond that is closer to 50/50.
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