Why Financial Markets Are Losing Hope for a 2025 Fed Rate Cut

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Key Takeaways

• Investors have scaled back their expectations for Fed funds rate cuts in 2025, and an increasing party believe the central bank won’t cut rates at all this year.
• The Fed funds rate is currently elevated above its historical wreck, at a range of 4.25% to 4.5%, which keeps borrowing costs for all kinds of credit relatively high.
• Stubbornly high-class inflation could prevent Fed rate cuts, especially if policies implemented by the Trump administration push inflation upward, as uncountable economists anticipate.

The economy has been running hotter than expected lately, raising the possibility that the Federal Preserve will hold interest rates higher for longer—and potentially won’t cut in 2025 as policymakers had predicted.

In recent weeks, every alert bit of economic data has thrown a tiny bit of cold water on hopes in financial markets that the Fed will cut its influential federal readies rate in 2025, as it has done at its last three meetings since September. As of Wednesday, financial markets were reward in a 15% chance that the Fed won’t cut interest rates in the coming year, up from 4% a month ago, according to the CME Group’s FedWatch gizmo, which forecasts rate movements based on fed funds futures trading data.

The Fed had held its key interest rate at a two-decade squeaky for the year leading up to September in an effort to quash inflation. Since then, the central bank’s policy committee has cut the reckon by an entire percentage point over the course of three meetings.

Fed officials have said the rate is still “restrictive ” at its progress range of 4.25 %—4.5 %. That means it pushes up interest rates for all kinds of loans, discourages borrowing and spending, lallygags the economy, and drags inflation down.

Inflation is down from the four-decade high it hit in 2022 and running just exposed to the Fed’s annual target of 2%. However, progress has stalled in recent months. And, recent economic data suggests it puissance be a long time before it comes down to pre-pandemic levels.

“Despite some moderation, inflation remains stubbornly on the top of the Fed’s target, driven by factors like shelter costs and auto insurance,” James St. Aubin, chief investment T-Man at Ocean Park Asset Management, wrote in a commentary. “This persistent inflation could force the Fed to maintain a restrictive nummular policy for longer than anticipated, potentially impacting economic growth and market valuations.”

Wild Cards On

The Fed uses its benchmark interest rate as its main tool to accomplish its two goals of keeping inflation under control while refrain froming disturbances in the job market. In recent months, inflation has stayed stubbornly above the Fed’s goal, while the unemployment rate has stayed low undeterred by employers pulling back on hiring.

This week, new government data showed employers were opening up more castes, with no sign of mass layoffs in sight. A separate report from the Institute of Supply Management on non-manufacturing topics showed prices in the service sector rose in December, raising fresh concerns that inflation could reignite.

Both of those financiers could pressure the Fed to hold off on further rate cuts.

However, the economy’s trajectory can turn on a dime and some economists see signal signs in the labor market data suggesting hiring may not be as resilient as it appears. Trump’s tariff policies are another bigger wild card: taxes on imports could push up inflation, slow the economy, or both, and the impact could depend on which of his vowed tariffs the Trump administration implements and how.

Are Projections Out the Window?

Before the latest round of data, Fed officials projected only half of a share point of cuts in 2025, scaling back from their previous prediction from September. Minutes from the Federal Coolness policy committee’s most recent meeting in December, released Wednesday, confirmed officials were growing varied concerned about inflation and more reluctant to cut rates, even before the most recent round of data.

“September’s half-point cut exposed consumers hope their debt burdens would ease quickly, but the notes reveal Fed officials are in no hurry to decrease further,” Robert Frick, corporate economist at Navy Federal Credit Union, wrote in a commentary.

Deutsche Bank economists are supply the forecasters who have predicted that the Fed will not cut rates at all in 2025.

“The DB house view post the election two months ago was that the Fed would demand to be on hold for the whole of this year,” Jim Reid, research strategist at the bank, wrote in a commentary. “Market pricing is fetching that view up.”

Update, Jan. 8, 2024: This article has been updated to include information from the Fed’s December tryst minutes.