Why there might be fewer Fed rate cuts in 2025?

The US Federal Reserve will deliver the outcome of its monetary policy meet along with revised forecasts for 2025 on December 18.

Global markets are pricing in a near-certain chance of the Federal Reserve delivering a quarter-point rate cut following its two-day policy meeting on December 18. While a third straight rate cut appears likely, investor caution remains high due to lingering uncertainty over the pace of policy easing in 2025.

There is widespread caution amongst investors that Fed policymakers will signal a slowdown in rate cuts after delivering one in December. Several underlying factors contribute to this skepticism. Firstly, the recent hotter-than-expected inflation prints over the past two months suggest that prices have become sticky, and any relief may take longer. Adding to concerns, the evidence that the US economy is still growing at a solid pace, and the labour market has not witnessed much strain, has sparked fears that the Fed may not lower rates as swiftly as previously indicated.

In September, the Fed's projections indicated four rate cuts in 2025. However, with inflation proving more persistent and the US economy remaining resilient, analysts now believe the number of cuts could be reduced. Alongside its rate decision, the Fed will release updated economic forecasts, including projections for the anticipated number of interest rate cuts in the year ahead.

Several analysts anticipate the Fed to deliver a third straight interest cut in December, following which it might slash rates at a gap of one more or more meetings. On that account, markets are currently pricing in the possibility of two more rate cuts in 2025.

Furthermore, there's also the potential for major tax changes, spending, tariffs and immigration policies under Donald Trump as he takes office in 2025, adding another layer of caution for the Fed. Analysts at Nomura believe that the policies of the incoming Trump administration are likely to drive the outlook for growth and inflation in 2025.

Also Read | US Fed expected to deliver quarter-sized December rate cut; all eyes on future policy trajectory

Analysts also anticipate a rise in tariffs early next year, which could drive inflation higher and slow investment growth. They believe the negative impact of these tariffs will likely be only partially offset by an extension of Trump’s tax cuts and deregulation.

Accordingly, most market experts are anticipating the Fed to also factor in the effects of Trump's possible policy and tax changes into its economic analysis, prompting the US central bank to revise its forecasts for growth, inflation and rate cuts that it rolled out in September this year.

Along those lines, analysts at S&P Global also expected the Fed to cut rates more gradually than previously expected. It now expects the Fed funds rate to reach 3.5-3.75 percent by the end of 2025, compared with the previous forecast of 3-3.25 percent.

On the other hand, JPMorgan economists anticipate the Fed to slow rate cuts to just one per quarter, eventually pausing indefinitely after reaching a target range of 3.5-3.75 percent at the next September FOMC meeting. Economists at Morgan Stanley also share a similar view, forecasting the Fed to cut rates to that same range by May, then pause rate cuts until 2026 due to "signs of stickier inflation and overall policy uncertainty."

Analysts at Nomura though, have a slightly bearish outlook, forecasting just one rate cut in the first quarter of 2025 to a rate of 4.125 percent. "Cuts may resume in 2026, once the inflationary impulse from tariffs has faded," Nomura stated.

Also Read | Fed rate cut almost a certainty this week, but next year is a different story

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