Fed Expects Fewer Rate Cuts in 2025: What the Experts Say

The Federal Reserve on Wednesday took the widely expected step of cutting interest rates by a quarter of a percentage point. Of greater interest to market participants, however, was the central bank’s more restrictive outlook for monetary policy next year, experts say.

The Federal Open Market Committee (FOMC) concluded its regular two-day policy meeting on Wednesday with a cut in the short-term federal funds rate by 25 basis points (bps), or 0.25%, to a target range of 4.25% to 4.50%.

“Recent indicators suggest that economic activity has continued to grow at a solid pace,” the said the FOMC said in a statement. “Labor market conditions have generally eased since the start of the year and the unemployment rate has increased but remains low. Inflation has made progress toward the committee’s 2 percent target but is still somewhat elevated.”

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At the same time, the FOMC released its latest edition Summary of economic forecasts (SEP). Market participants examine the so-called dot plot for clues about the future course of monetary policy.

Remember that the Fed has a dual mandate. In addition to stable prices, the central bank should also support maximum employment. Given the delayed impact of restrictive monetary policy on the labor market, Wednesday’s rate cut was a foregone conclusion.

However, increased inflation, decent economic growth, rising stock prices and the tariff policy proposed by the new government make it difficult to forecast the development of interest rates in 2025.

“The actual cut was the least important part of the December FOMC meeting,” writes Jack McIntyre, portfolio manager at Brandywine Global. “When you factor in the forward guidance components, it was a ‘hawkish cut.'” Stronger expected growth coupled with higher expected inflation – it’s no wonder the Fed has reduced the number of expected rate cuts in 2025.”

McIntyre adds that the Fed has entered “a new phase of monetary policy – the pause phase.” The longer the pause period lasts, the more likely it is that market participants will have to evaluate an interest rate increase and a rate cut equally. “Political uncertainty will make financial markets more volatile in 2025,” notes the portfolio manager.

With the FOMC’s latest interest rate decision now in hand, we reached out to economists, strategists and other experts to learn what this move means for markets, macroeconomics and monetary policy going forward.

Below is a selection of their comments, sometimes edited for brevity or clarity.

Interest rates: The experts weigh in

Federal Reserve builds interest rate hikes

(Image credit: Getty Images)

“Nuanced. That’s the only way to describe what the Fed is doing now. The path to its 2% inflation target has been extended as expected rate cuts this year and next have been scaled back. Unemployment is stable at current levels and the GDP forecast has been raised this year.” It remains stable in 2025 and 2026. The Fed seems to feel that it is still being too restrictive, endangering the labor market, while feeling that it should slow down based on the idea of sustained economic growth. The question of where “neutral” actually is remains open.” – Steve Wyett, Chief Investment Strategist at BOK Finance

“Goodbye, punchbowl. No Christmas cheer from the Fed. Policymakers expect higher inflation and lower unemployment in 2024. Given this outlook, there is simply no reason to be dovish. The simple lifting has now occurred because interest rates are no longer clearly restrictive.” It is a logical time to pause. The Fed has initiated a soft landing, and now we will see whether the economy can stay upright or whether it will tip over. The new administration’s fiscal policy is now in Trump’s hands, for better or for worse. – David Russell, global head of market strategy at TradeStation

“The summary of economic forecasts is decidedly hawkish, with only two rate cuts forecast for 2025, pointing to greater concerns about persistent or resurgent inflation. The Fed appears to have moved back to prioritizing inflation risks over unemployment and is preparing for a rate cut in January. “Possibly a longer pause in 2025 if inflation pressures persist and the economy remains robust.” – Dan Siluk, Head of Global Short Duration & Liquidity and Portfolio Manager at Janus Henderson Investors

“The new statement was almost a carbon copy of the November statement – a minor change was made to just one line – but FOMC participants surprised by halving their expectations for further easing next year to just 50 basis points. This was anything but a close call; 10 participants agree with the median forecast, while only five believe easing of 75 basis points or more next year would be appropriate. A January break is now clearly the committee’s base case and the revisions raise some doubts about easing in March, although this remains our key expectation.” – Samuel Tombs, Chief U.S. Economist at Pantheon Macroeconomics

“Fed signals were more hawkish than expected, with a dot plot forecast of 50 basis points (bps) of easing in 2025, up from 100 in September. FOMC participants maintained the same GDP growth and unemployment forecasts for 2025 but raised their inflation expectations, suggesting “more work remains to achieve the 2% target.” – Ronald Temple, Chief Market Strategist at Lazard

“The Fed needs to see further progress on inflation before considering cutting interest rates again. We expect to see progress throughout 2025 (assuming tariffs do not interfere).” – Michael Gregory, deputy chief economist at BMO Capital Markets

“As expected, the FOMC today cut interest rates by 25 basis points, completing the full 1% rate cuts for 2024. The aggressive monetary easing remains surprising given the overall resilience of the economy, stock markets and Bitcoin at record highs and inflation above 3% for 43 consecutive months – the longest period since the early 1990s.” – Ben Vaske, senior investment strategist at Orion portfolio solutions

“Today’s rate cut represents a turning point as the cost of reducing inflation continues to rise. The Fed is starting to walk on increasingly thin ice. It has proven difficult for the central bank to cross the last half-point of inflation to reach its target of 2% after months of historically high federal interest rates, cracks are beginning to appear in the labor market. As we head into 2025 – with uncertainty looming and a new government taking office – frontline government and healthcare jobs are the places to watch. While both have proven to be resilient employment sectors so far, slowing employment growth here could point to more serious economic signals in the coming year.” – Edward Hearn, senior economist at UKG

“While the Fed chose to round out the year with a third straight rate cut, its New Year’s resolution appears to be a slower pace of easing. Due to the recent stronger data, changes to the FOMC’s inflation and unemployment forecasts have been hawkish and the point-in-point is currently only scheduled for two rate cuts in 2025. We expect the Fed to choose to forego a rate cut in January before resuming its easing cycle in March.” – Whitney Watson, global co-head and co-chief investment officer of fixed income and liquid solutions Goldman Sachs Asset Management

“Markets should be pleased that the Fed is taking a measured approach to normalizing interest rates. The Fed knows that service sector inflation has been stubborn lately, so it has to wait for the first series of rate cuts, so it is signaling this to the markets. “They are prepared to stop or even raise rates again if inflation does not subside downstairs.” – Jamie Cox, Managing Partner for Harris Financial Group

“The Fed’s updated forecasts today represented an even sharper reversal than markets expected, lowering its rate cut forecast to just 50 basis points in 2025. The market’s reaction was immediate and clear: stocks plunged when the news broke It was expected that interest rates would rise in the longer term, and government bond yields rose slightly. – Jim Baird, Chief Investment Officer at Plante Moran Financial Advisor

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Fed Expects Fewer Rate Cuts in 2025: What the Experts Say

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