The Federal Open Market Committee has seven remaining scheduled meetings for 2025 with the next on March 19. The expectation of fixed income markets is that interest rates will be cut in 2025 most likely two or three times. However, these cuts may be weighted towards later in the year, with the next interest rate cut most likely in June. There was no change in interest rates when the FOMC met in January.
The FOMC’s Meeting Calendar
The FOMC’s next two interest rate decisions on March 19 and May 7 are seen as less likely to deliver interest rate cuts with short term rates likely remaining at the current level of 4.25% to 4.5%. There’s a very slim chance of a March interest rate cut currently.
However, fixed income markets project that by June 18 or July 30 one, or possibly even two, interest rate cuts become more likely. Markets have less clarity for the remaining three meetings of the year with plenty of economic data incoming. Nonetheless, the final three scheduled interest rate decisions of September 17, October 29 and December 10 are expected to bring at least one or perhaps two more interest rate cuts compared to the earlier meetings.
Overall, the view of the market is that interest rates are almost certainly coming down in 2025, with the main question being by how much. For example, Jerome Powell framed the question as not whether rates are going lower but how fast. “With our policy stance now significantly less restrictive than it had been and the economy remaining strong, we do not need to be in a hurry to adjust our policy stance. We know that reducing policy restraint too fast or too much could hinder progress on inflation,” at Senate testimony on February 11. However, in the view of markets the extent of lower interest rates spans a broad range with one to four interest rate cuts all quite possible and a slim chance of additional cuts later in 2025.
How The FOMC Will React To Incoming Data
The FOMC expect that inflation will trend closer to its 2% annual target over the remainder of 2025. Tariffs have the potential to complicate that picture by raising prices on imported goods. Nonetheless, the FOMC may chose to look through what could be a one-time increase in prices. Federal Reserve Governor Adriana Kugler hinted at this saying, “The potential net effect of new economic policies also remains highly uncertain and will depend on the breadth, duration, reactions to, and, importantly, specifics of the measures adopted,” at a speech on February 20.
Risks To Growth
The FOMC does not just look at inflation, and the market is perhaps becoming a little concerned that the Fed may need to act to help maintain employment levels. A recent wildcard are some early hints that the consumer may be softening and the jobs market might be losing a little momentum. This data is hard to parse as some of it appears to stem from consumer and business fears about tariffs rather than hard data on current economic realities. Nonetheless, sometimes economic fears can be self-fulfilling if they lead to tangible actions such as households trimming budgets and firms delaying expenditures.
Rate Cuts Likely In Most Scenarios
Overall though, the FOMC may cut rates if there’s disinflation bringing inflation closer to target or if there’s slowing jobs growth and a potential need to bolster the economy. One of these is a relatively rosy economic scenario, the other less so, nonetheless, either or both would likely see rate cutting by the FOMC.
What To Expect For Rates In 2025
Ultimately it appears likely several interest rate cuts are coming in 2025. As Fed Governor Christopher Waller said in a speech on February 18, “Waiting for economic uncertainty to dissipate is a recipe for policy paralysis.” Nonetheless, what the economic data reveals over the coming months will inform how aggressive the FOMC is in cutting rates in 2025.
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