Despite expectations of interest rate cuts by the Federal Open Market Committee (FOMC) in 2025, there remains uncertainty regarding the extent and timing of these reductions. Interest rate futures suggest a potential decline to around 3%, but other economic indicators hint that rates may stay closer to the current 4.5% to 4.75%. The FOMC’s September projections, which projected rates at the end of 2025 between 3% and 4%, are likely to be revised as new economic data emerges. The FOMC will provide updated forecasts after their next meeting on December 18, 2023, and while policymakers are leaning toward the lower end of the rate range, significant variability remains possible depending on economic conditions.
The FOMC’s scheduled meeting calendar for 2025 reflects their traditional schedule, with key meetings on January 29, March 19, May 7, June 18, July 30, September 17, October 29, and December 10. Key meetings that might influence decision-making include those in March, June, September, and December, as these will coincide with updates to economic projections. Each decision will be accompanied by press releases and press conferences led by Chairman Jerome Powell, ensuring clarity about the rationale behind any interest rate changes.
Interest rate decisions by the FOMC will primarily focus on inflation and unemployment, the two key components of the Federal Reserve’s dual mandate. The ongoing challenge for policymakers is the persistent inflation that remains above the target rate of 2%, with October 2023 data indicating a Consumer Price Index (CPI) annual inflation rate of 2.6% and a core inflation rate of 3.3%. The Personal Consumption Expenditures (PCE) price index, which the FOMC prefers, showed slightly more favorable figures at 2.1% for headline inflation and 2.7% for core inflation as of September 2024. While inflation is significantly reduced from its peak, it remains a concern as the FOMC aims to guide inflation rates down towards their target.
Housing market trends may provide some relief in controlling inflation, as declines in shelter costs could help bring rates back to the target level. Although forecasts indicate a potential easing in inflation, as predicted by the FOMC’s September assessment, this trend has yet to manifest in the CPI data. Therefore, the Federal Reserve maintains a cautious stance toward their goal of reining in inflation and aligning it back to their 2% target.
Employment data, however, poses a greater uncertainty for the FOMC’s strategy moving forward. Although the job market has shown signs of cooling and unemployment increased from low levels, recent data suggests resilience. Unemployment rates fluctuated from 3.8% to 4.3% between March and July 2024, raising fears of recession. However, a decline back to 4.1% in subsequent months suggests the economy may be able to sustain a “soft landing” without excessive fallout from interest rate hikes. If unemployment continues to hover without a sharp increase, the FOMC could afford to prioritize inflation control, potentially maintaining rates at higher levels longer to hasten the approach to the desired inflation target.
Ultimately, FOMC decisions in 2025 will hinge on the interplay between employment trends and inflation pressures. A significant weakening of the job market could lead to a rapid rate cut, with projections suggesting rates might settle closer to 3% by year’s end. Conversely, a stable labor market could support a more measured approach to rate reductions, whereby rates remain closer to 4%, allowing the FOMC to address rising inflation more effectively. As the Federal Reserve navigates this complex economic landscape, the future trajectory of interest rates will heavily depend on upcoming economic data and trends, reinforcing the necessity for consistent monitoring and analysis.