Fixed income markets anticipate that the Federal Reserve will cut interest rates in 2025, but not by much. Short-term interest rates are expected to end 2025 close to 4%, down from the current 4.25% to 4.5% range as of January 2025. This is after the Fed cut rates in December 2024. This forecast assumes that the U.S. economy continues to grow, unemployment remains slightly above 4% and inflation ends the year close to 2.5%. These projections were the median forecasts of Federal Open Market Committee policymakers in December 2024. If the economy performs differently than these expectations, then the interest rate outlook will evolve too.
The Expected Path For Interest Rate Cuts In 2025
The FOMC will meet eight times in 2025 according to the current schedule. However, emergency meetings can be held at any time.
The FOMC Meeting Schedule For 2025
The first decision of 2025 will come on January 29, with the expectation of fixed income markets are that rates are held steady at that meeting. Then there’s currently forecast to be roughly an even chance of a cut on March 19. Rates may again be held steady on May 7 and June 18 before another material chance of a cut at on July 30 or September 17. There’s then a broader spread of outcomes for October 29 and December 10. If the economic picture were to change significantly during 2024, then these meetings could see additional interest rate cuts, though that currently viewed as less likely.
Fixed Income Market Expectations
Overall fixed income markets expect two or three cuts in 2025. The FOMC’s own forecasts from December 2024 suggest that two cuts are currently expected with a range of outcomes from no change to interest rates up to five potential cuts. Each outcome represents the forecast of an individual policymaker.
As such, the first half of the 2025 may see just one cut in interest rates, with the second half of the year less predictable but most likely to see another one or two interest rate reductions.
Economic Unknowns For 2025
Of course, the FOMC emphasizes that their decisions are data dependent. Now inflation has fallen back from elevated levels, they are comfortable that rates, too, have been adjusted downward adequately.
However, perhaps the most closely watched variable will be unemployment. As of November 2024, the unemployment rate stood at 4.2%, policymakers don’t expect it to move up much more in 2025, and for any increase to be at a relatively measured pace. An abrupt increase in employment could lead to more aggressive interest rate cuts from Fed policymakers.
Inflation
The inflation rate will also be closely watched, current expectations are that inflation will remain above the FOMC’s 2% annual inflation goal for 2025, but not by much. If inflation were to accelerate materially, then that would be a concern for FOMC officials.
However, that’s not currently in any forecast, with even the most hawkish projections showing interest rates being held steady in 2025 rather than increasing. However, if inflation did return to 2% or fall below it, perhaps if shelter costs were to decline, then we could see more than two interest rate cuts.
What To Expect From The Fed For 2025
2025 is expected to see interest rate cuts from the FOMC, but at a relatively slow rate, with two cuts the most likely scenario. There’s more uncertainty in the second half of the year, when rising unemployment or disinflation could prompt Fed officials to reduce rates more than currently estimated.
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