Upcoming Decisions by the Federal Reserve
Federal Reserve Expected to Lower Interest Rates Later in 2025
The Federal Reserve, the U.S. central bank, is anticipated to lower interest rates in the remaining months of 2025, according to a consensus among economists and market participants. However, the timing and extent of these cuts are subject to various factors, particularly inflation trends and labor market developments.
Jerome Powell, one of 12 voting members of the Federal Open Market Committee (FOMC), oversees the short-term federal funds rate. The FOMC's primary mandate is to maintain stable prices and support maximum employment.
Recent inflation figures have caused a stir. U.S. CPI inflation picked up to 2.7% year-over-year in June, according to Priscilla Thiagamoorthy, senior economist at BMO Economics, with core inflation increasing a tenth to 2.9%. This uptick in inflation has led some experts to believe that the Fed will be more patient with potential rate cuts, as inflation remains above forecast and the labor market remains strong.
However, the Fed's stance on interest rates is not set in stone. Chris Zaccarelli, chief investment officer for Northlight Asset Management, stated that if inflation remains in check, the Fed could potentially cut interest rates as early as September. Conversely, if subsequent inflation reports show a different story, the Fed may have to stay on hold even longer.
The potential impact of tariffs on inflation is a key concern for the Fed. Some members argue for maintaining higher rates to counteract inflation triggered by tariffs, viewing tariff-driven price increases as one-off shocks rather than persistent inflation drivers. Others interpret recent weakening in job growth as justification for cuts to manage downside economic risks.
Market participants expect the Fed to cut short-term rates by 25 basis points (a quarter of a percentage point) twice this year, with the first reduction coming no sooner than September. As of July 21, interest rate traders assigned a 60% probability to a quarter-point cut at the September meeting, down from 66% a week ago.
Experts predict that the Fed will lower interest rates two to four times in the remainder of 2025, potentially lowering the policy rate from the current ~4.25-4.50% range down to around 3.25-3.5% by early 2026. However, the Fed's decision will depend heavily on the evolution of inflation and the labor market.
In summary, the Fed is expected to lower interest rates in the remaining months of 2025, but the timing and magnitude depend strongly on inflation trends (including tariff pass-through effects) and especially on labor market developments consistent with its dual mandate of maximum employment and stable prices.
In light of ongoing discussions, Jerome Powell, a member of the Federal Open Market Committee (FOMC), might consider using potential interest rate cuts as a tool for managing downside economic risks related to finance and investing, while maintaining a wallet full of options to respond to fluctuations in inflation and the labor market, as per the FOMC's primary mandate.
With experts predicting multiple interest rate cuts in the latter half of 2025, traders are closely monitoring the situation, anticipating potential trading opportunities arising from the projected adjustments in interest rates, which could ultimately impact the broader investment landscape.
