Anticipating its forthcoming gathering, speculations abound on the Federal Reserve's likely actions.
Federal Reserve Interest Rate Cuts in 2025: A Timely Shift Amid Inflationary Pressures
After months of maintaining steady interest rates due to persistent inflation and tariff-related pressures, the Federal Reserve is now poised to initiate a series of rate cuts, with a high market probability for a 25-basis-point cut as early as the September 2025 meeting.
J.P. Morgan forecasts that after a September 2025 cut, the Fed could implement a total of about three 25 bp cuts through early 2026, potentially lowering the policy rate to a target range of 3.25%–3.5% by Q1 2026.
The Fed's decision-makers are cautious about cutting rates too soon due to the ongoing impact of tariffs, which act as one-off price level adjustments, keeping inflation above the Fed’s 2% target. If inflation pressure remains acute for the rest of the summer, as Jeffrey Roach, chief economist for LPL Financial, predicts, the Fed might delay rate cuts until September.
The labor market is a critical factor in the Fed's decisions. Recent weaker-than-expected July jobs reports have boosted expectations for rate cuts, but if the labor market remains tight (unemployment ~4.1% or lower), there might be dissent or hesitation on rate cuts to avoid overheating or persistent above-target inflation.
The Fed's dual mandate—fostering maximum employment and keeping inflation near 2%—is being tested by tariff-driven inflation. This complicates the Fed's decision-making process, as it creates above-target inflation, potentially prompting the Fed to maintain higher rates longer despite signs of labor market weakness.
Market and expert expectations are converging on the likelihood of the Fed initiating rate cuts soon, conditioned heavily on how labor market conditions evolve and how tariffs impact inflation persistence. The Fed's decisions will reflect careful balancing of its dual mandate amid ongoing inflationary pressures from tariffs.
As of July 21, interest rate traders assigned a 60% probability to a quarter-point cut at the September meeting. However, this probability could change depending on the evolution of labor market conditions and inflationary pressures in the coming months.
- Fed's Dot Plot Shows No Rate Hikes This Year, One in 2024
- Fed's Dot Plot: No Rate Hikes Expected in 2023, One in 2024
- Fed Officials See No Rate Hikes This Year, One in 2024
- Fed's Dot Plot: No Rate Hikes Expected in 2023, One in 2024
- Businesses and traders may adjust their finance strategies given the Fed's indications of no rate hikes this year and one in 2024, potentially impacting their trading wallets.
- With the Fed's forecast of no rate hikes in 2023 and a single increase in 2024, there could be significant implications for business and personal finance, as people and companies might choose to hold onto their funds more cautiously.
