Anticipating Interest Rates for the Rest of 2025: A Look Ahead
The Federal Open Market Committee (FOMC) is currently maintaining interest rates, but there is a growing expectation that the committee may cut rates one to two times before the end of 2025. This anticipation stems from mixed views within the committee and recent labor market data that indicate a slowing job market and slightly elevated inflation pressures.
In July, the FOMC held the federal funds rate steady at 4.25% to 4.50%, marking the fifth consecutive meeting without a change since December 2024. However, the decision was not unanimous, with two members dissenting to lower rates, signaling divisions within the committee about economic conditions.
The labor market data showed more weakness than previously reported, with a higher unemployment rate of 4.2% and a downward revision of job growth by 258,000 jobs. This weaker labor market has led some regional Fed presidents, including typically hawkish members like Neel Kashkari, to support rate cuts potentially as soon as September.
Inflation remains somewhat elevated but is expected to gradually ease. The Fed is cautious about cutting rates too quickly because inflation might stay above the 2% target for some time, and they want to be certain that inflation pressures are truly diminishing before easing policy further.
Market pricing and derivatives suggest a likelihood of one or two rate cuts by the end of 2025. However, the ultimate pace and size of cuts depend on forthcoming inflation and labor market data.
The FOMC's decision in September will largely depend on labor market data, with the committee set to review August's jobs report, scheduled for release on September 5, before they meet on September 17. If the labor market is seen to be slowing, as July's jobs report suggests it could be, then the FOMC may elect to address that with lower interest rates, even if inflation remains a little above target.
In addition to the September meeting, the FOMC has two more scheduled meetings left in 2025, on October 29 and December 10. The September and December meetings will also include an update to the FOMC's Summary of Economic Projections.
Some policymakers have argued that the FOMC should look through what may be a one-time increase in prices due to tariffs. The most recent CPI report for June showed some inflationary pressure from tariffs on the prices of goods. Updates to the Consumer Price Index will be released on August 12 and September 11.
Jerome Powell, the Fed Chair, will hold a press conference after each meeting. Powell is also scheduled to speak at the Jackson Hole Economic Symposium during August 21-23. Governor Waller telegraphed his dissent in a recent speech, and Michelle Bowman explained her dissent in a recent statement.
Despite slowing job growth, unemployment has remained in a relatively narrow band of 4% to 4.2% since May 2024. However, the pace of hiring over the past three months is now the slowest since the last recession.
According to the CME FedWatch Tool, the Federal Funds rate is expected to end the year at under 4%. As the FOMC navigates these economic challenges, their decisions will be closely watched by investors and the broader economy.
- In light of the growing expectation for the Federal Reserve to cut interest rates, investors might want to adjust their finance strategies, considering the potential impact on their businesses and investments.
- The next Federal Reserve meeting in September could bring significant changes to the monetary policy outlook, given the mixed views within the FOMC, unemployment figures, and inflation pressures that could influence the outlook for interest rates.
