Federal Reserve Interest Rate Outlook

Investing.com – The Federal Reserve is likely to cut interest rates three times in 2025 as inflationary pressures subside and the US employment picture remains balanced, according to analysts at Wolfe Research.

Economic Signals

A raft of economic figures earlier this week pointed to an unexpected increase in job openings and sticky inflation. The readings, which came ahead of the all-important monthly US employment report later this week, bolstered bets that the Federal Reserve will carefully approach any possible interest rate reductions in 2025.

However, the data showed that the key openings-to-unemployed ratio remained flat at around 1.1 roles per jobless person in November, indicating that the once-hot US labor market is “coming back into better balance,” the Wolfe Research analysts said in a note to clients on Wednesday. As a result, although they expect that near-term strength in job demand will keep expectations for the number of Fed borrowing cost cuts this year at between one to two, they still argue the central bank will opt for a third drawdown by December.

Investor Expectations

Investors are now anticipating the Fed will slash borrowing costs by 37.5 basis points by the end of the year, with the first drawdown not fully priced in until July, Reuters reported.

Caution from Fed Officials

Recently, Fed officials have been signaling caution around further rate cuts following a decision to slash borrowing costs by a quarter of a percentage point at their December meeting. On Wednesday, minutes from this gathering could provide more clues into how policymakers will approach more decreases, particularly with the incoming Trump administration’s sweeping tariff plans clouding the broader economic outlook.

Indeed, uncertainty around Trump’s proposals for trade and taxes has led some officials to consider future rate cuts as if they were “driving on a foggy night or walking into a dark room full of furniture,” Fed Chair Jerome Powell said in December.

Following last month’s meeting, projections show that Fed officials are now projecting only 50 basis points in rate cuts this year. In September, estimates were for a full percentage point in reductions.

(Reuters contributed reporting.)