The next interest rate cut will most likely come in June according to fixed income markets. The Federal Open Market Committee has held interest rates steady at meetings in January and March. The pause in interest rate cuts has primarily been due to waiting for further progress on disinflation at a time when the job market appears robust. However, economic uncertainty has risen, clouding the outlook for monetary policy.
Two Cuts Expected By Policymakers In 2025
The FOMC sees elevated uncertainty in the economic outlook. Policymaker forecasts imply an average of two cuts in 2025, as updated on March 19. Importantly, despite the average expectation of two cuts remaining the same, the range of outcomes from policymakers is now skewed to fewer cuts than in December projections. Interest rate cuts could come if inflation cools further and the jobs market remains robust. Though policymakers do apparently see tariffs creating some inflation in 2025 on their recent projections.
Federal Reserve Chair Jerome Powell commented on inflation saying, “Some near-term measures of inflation expectations have recently moved up.” At his March 19 press conference. Powell continued. “We see this in both market- and survey-based measures, and survey respondents, both consumers and businesses, are mentioning tariffs as a driving factor. Beyond the next year or so, however, most measures of longer-term expectations remain consistent with our 2 percent inflation goal.”
Recession fears, which have increased somewhat based on survey data, could also trigger rate cuts. Despite recession fears, reported economic data has been broadly positive. Forecasting site Kalshi, puts the chance of a 2025 recession at 36%.
The Timing Of The Potential Next Interest Rate Cut
Powell did not suggest interest rate cuts were imminent at his March 19 press conference. Rather, he emphasized considerable economic uncertainty. Often policymakers will hint a cut is coming at the next meeting to help manage expectations. Without evidence of that fixed income markets give only a 16% of a May 7 cut in interest rates.
Differing Forecasts For The Range Of Interest Rate Outcomes
However, markets are confident that the FOMC will cut interest rates by June 18 giving a 78% chance that interest rates are below their current level of 4.25% to 4.5% by then according to the CME FedWatch Tool.
For 2025 as a whole, fixed income markets see between two and four interest cuts as likely. In contrast, FOMC policymakers’ projections imply a different view, implying two cuts as the most likely outcome with fewer cuts possible.
Powell suggested that the lack of change in the interest rate forecast might be due to inertia in the face of uncertainty, “We’re going to have to see how things actually, actually work out. And the fact that there wasn’t much change, I think that’s partly because, you know, you see — you see weaker growth but higher inflation, they kind of offset. And also, frankly, a little bit of inertia when it comes to changing something in this highly uncertain environment, you know, I think there is a level of inertia where you just say, maybe I’ll stay where I am.”
Economic Uncertainty
With assessments of economic uncertainty at very high levels compared to recent history, much will depend on how economic data plays out.
There are rising fears of recession. For example, economic research from UCLA published in March suggested that, “a downturn could result over the coming year or two.” This assessment argues that the impact of tariff levels perhaps rising to a level not seen in a century could lead to supply chain dislocation. Government spending cuts, too, may dampen demand. Lastly, immigration policies could reduce labor supply with particular impacts on the construction and agricultural sectors. Consumer confidence has also declined in recent surveys.
However, reported economic data remains generally robust. For example, jobless claims as reported on March 20, remain consistent with levels over the past two years. In addition the unemployment rate was reported as 4.1% for February, this rate has remained in a narrow band of between 4% and 4.2% since May 2024 and is not at historically elevated levels. That said, it may take until perhaps May or later for the economic impact of recent policy changes to be fully assessed in reported economic data.
The Outlook For Interest Rates
For now, the FOMC is projecting two interest rate cuts for 2025, with the first perhaps coming in June. However, economic uncertainty is high, and the fixed income markets see a reasonable chance of deeper interest rate cuts. The FOMC often stress that their actions are data dependent, but that will be particularly true of the coming months as there is considerable divergence of economic forecasts.
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