Will Fed cut rates four times in 2025?

Uncertainty is surrounding the trajectory of US interest rates, particularly following last week's Federal Reserve meeting, which raised concerns on Wall Street.

The central bank's meeting showed a divide within the Federal Open Market Committee (FOMC) regarding the economy's performance, the need for further rate cuts, and whether inflation is reaccelerating.

The committee's December meeting statement indicated that the Federal is shifting focus from unemployment to controlling inflation, which signals that the central bank may pause after two more rate cuts next year, rather than the four cuts that had been previously expected.

On Dec. 18, the Fed slashed interest rates by 0.25% to a range from 4.25% to 4.5%, as widely expected.

However, it is unlikely that the Fed will make a similar cut in its next meeting on Jan. 29.

A similar rate cut at the next Fed meeting on January 29 is unlikely.

With elevated U.S. consumer inflation rates and still low unemployment rates, the Fed is not under pressure to cut interest rates urgently.

"Based on my estimate that monetary policy is not far from a neutral stance, I prefer to hold policy steady until we see further evidence that inflation is resuming its path to our 2% objective," Beth Hammack, President of the Federal Reserve of Cleveland.

Chair Jerome Powell made clear the central bank is entering a new phase where future rate cuts will likely be at a more gradual pace and depend on whether inflation ebbs.

Jan Hatzius, chief economist at Goldman Sachs, said “I think it’s a pretty strong message that a cut in January is unlikely. Beyond that, the data are really going to have to drive it.”

Global Interest Rate Fall

The debate over interest rates next year may be more complicated due to a series of potential political changes from the newly elected President, Donald Trump, including plans to raise tariffs, deport millions of immigrants, and cut taxes.

However, the Fed may need to cut interest rates more than twice next year, and it could slash rates four times. This is because the interest rate cut in the Eurozone is leading to a drop in US Treasury yields in the second half of the year.

The European Central Bank will likely cut interest rates four or five times in 2025, to a range from 1.75% to 2%.

The risk of a recession may worsen in the largest economies of the Eurozone, with the possibility of France also slipping into recession amid a political crisis.

And economic and political chaos is also occurring elsewhere in the world. As an example, Brazil has been actively striving to support its currency, the real, but, with a 10% budget deficit, a president recovering from emergency brain surgery, and seemingly no end to government spending, Brazil seems to be copying Argentina and may soon have to devalue its currency.

As a result of the chaos in Brazil, France and Germany, plus economic growth sputtering in China as its population continues to shrink by more than 2 million people per year, the US remains the growth engine of the world.

Falling interest rates around the world will trigger capital flight into US Treasurys, driving those yields down. Since the Fed never fights market rates, I am confident that central bankers will cut its key interest rates in the U.S. four times in 2025.

As a result, Louis Navellier, founder and chief investment officer at Navellier & Associates, believes the Federal may be forced to cut interest rates four times in 2025.

Sources: MarketWatch, Forbes, Bloomberg