BCA Research Predicts Significant Fed Rate Cuts in 2025

Investing.com — BCA Research anticipates that the Federal Reserve will implement interest rate cuts exceeding 50 basis points (bps) in 2025, deviating from the Federal Open Market Committee (FOMC) median forecast. This prediction of more aggressive easing comes as inflation is expected to fall short of the Fed’s targets, coupled with a rise in unemployment beyond forecasted levels.

According to BCA, the median FOMC member projects a 50 bps rate cut in 2025. This would adjust the target range for the funds rate from 4.25%-4.50% to 3.75%-4.00%. However, BCA contends that more substantial easing will be necessary due to decreasing core PCE inflation and a weakening job market.

Core PCE inflation, a crucial measure for the Fed, is anticipated to reach 2.5% by early 2025, assuming current trends persist. The report notes, "If monthly core PCE inflation prints at its 3-month average, the 12-month rate will hit 2.5% by March" or by February if it prints at its 6-month average. This indicates inflation could align with or dip below the Fed’s estimates sooner than expected.

The labor market shows diminishing momentum, with the unemployment rate rising to 4.2% from a cycle low of 3.4%. BCA raises concerns over the Fed’s year-end forecast of 4.3%, stating that reaching this level would necessitate significant labor market improvement, which they view as unlikely.

BCA outlines a potential scenario for rate cuts, starting with a 25 bps decrease in March. Chair Jerome Powell reiterated the Fed's reliance on data for rate decisions, mentioning that future actions will not be predetermined by past notes.

If three consecutive PCE inflation measurements average 0.2% or lower, BCA expects the Fed to implement another 25 bps cut, which could total as much as 100 bps in easing by the end of 2025.

The report also discusses the anticipated effect of tariffs under the incoming Trump administration. It suggests that while tariffs may temporarily increase inflation, the subsequent negative impact on manufacturing is likely to compel the Fed to expedite rate cuts in the latter half of the year.

Quantitative tightening (QT) is forecasted to decelerate by mid-2025 and to cease entirely by late 2025 or early 2026.