On December 13, 2023, U.S. Federal Reserve Chairman Jerome Powell announced that the Federal Open Market Committee (FOMC) would keep interest rates steady, signaling some stabilization within the economy. Looking ahead to 2025, the prevailing analysis focuses on the potential for interest rate reductions, shaped by two primary factors pivotal to the FOMC’s dual mandate: maintaining price stability and promoting full employment. The current economic landscape suggests that interest rates may decrease, but the extent of these cuts remains under deliberation.
One of the key motivators for potentially lowering interest rates is the improving inflation situation. The FOMC’s aggressive strategy to combat rising inflation saw interest rates soar from virtually zero to between 5.25% and 5.5% from January 2022 to July 2023. However, recent data indicates that inflation is substantially under control, having peaked at a 7.2% annual rate in June 2022 and moderating to just 2.2% by August 2024. This significant decline makes it plausible for the FOMC to consider reversing its previous hikes. The cautious trajectory of inflation towards the Fed’s target of 2% suggests that the decision to cut rates, as hinted during the first cut in September 2024, could continue if the trend persists.
On the other side of the economic equation is the labor market, which presents a more complex scenario. While the unemployment rate rose consistently through much of 2024, peaking at 4.3%, more recent employment data signaled a turnaround, with job creation increasing and unemployment falling in August and September. This fluctuation in employment dynamics leaves the FOMC in a delicate position, where the committee remains vigilant about potential economic disruptions. Given its dual mandate to foster full employment, the FOMC may be inclined to lower interest rates to prevent significant job losses in the event of a recession, thus incentivizing economic growth and job creation.
Looking ahead, the FOMC has set eight scheduled meetings in 2025 to determine interest rate policy, which include critical updates and press conferences led by Chairman Powell. These meetings, to take place in January, March, May, June, July, September, October, and December, will provide consistent platforms for assessing economic conditions and making necessary adjustments in monetary policy. Among these meetings, the March, June, September, and December sessions will feature the Summary of Economic Projections, allowing policymakers to share their forecasts and insights regarding economic growth and inflation metrics.
In terms of interest rate perspectives, FOMC members have expressed their expectations for short-term rates to average slightly over 3% by December 2025, with a median forecast of about 3.4%. This projection stems from insights shared during the FOMC’s last meeting in September and reflects a general consensus among policymakers that a reduction in rates is expected. While individual forecasts range from 2.75% to 4.25%, the broad agreement on lower rates indicates a responsive approach to current economic conditions, particularly favorable inflation trends.
Fixed income market projections corroborate FOMC forecasts, with the CME’s FedWatch Tool reflecting similar expectations for rate decreases. Market predictions suggest that by the end of 2025, interest rates could hover around 3.25% to 3.5%. The markets see a range of potential outcomes, including slightly lower rates than the FOMC’s earlier estimates, reinforcing a consensus on the likelihood of reduced rates under current economic conditions. Ultimately, the anticipated trend points to substantial cuts from the existing range of 4.75% to 5%, although uncertainties surrounding the labor market could play a significant role in determining the final rates, with a weaker job market potentially lowering rates below 3%.