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Most expect the Federal Open Market Committee to cut interest rates in 2025. However, the question remains how much and how fast. Fixed income market futures project that short-term interest rates could fall in 2025 perhaps as low as 3%. Alternatively given certain economic data, rates could remain relatively close to the current band of 4.5% to 4.75%.
FOMC policymakers project that rates will most likely end 2025 between 3% and 4%, and more likely at the lower end of that range. However, that was a September FOMC forecast, and economic data has been somewhat supportive of incrementally higher rates since then. The FOMC will update their rate projections at the conclusion of their next meeting on December 18. Nonetheless, as always, a broad range of outcomes will be offered and much will depend on incoming economic data.
The FOMC 2025 Meeting Schedule
Consistent with past years, the FOMC will hold eight scheduled meetings in 2025. Of course, the FOMC can update interest rates whenever they wish, but if the economy performs broadly as expected, then the FOMC will likely stick to the meeting calendar for setting interest rates. Here are the expected dates of FOMC decisions:
- January 29
- March 19
- May 7
- June 18
- July 30
- September 17
- October 29
- December 10
Of these the March, June, September and December meetings may prove more significant because FOMC policymakers with updated their economic projections. All decisions will be accompanied by a press release and press conference with Federal Reserve Chair Jerome Powell. Minutes of the meetings will be released 3 weeks after the event.
Economic Factors Impacting Rates
It is expected that the decisions from the FOMC will be informed primary by the trajectory of inflation and unemployment, which also the metrics that comprise the FOMC’s dual mandate.
Inflation Outlook
For inflation the main question is if and when inflation will hit the FOMC’s 2% annual goal and how much tolerance there will be for deviations from that target. For now, FOMC officials continue to stress the importance of achieving that 2% level. As of October 2024, Consumer Price Index annual inflation stands at 2.6% and 3.3% on a core basis (core strips out food and energy price trends). For Personal Consumption Expenditures Price Index, which the FOMC tends to prefer, the equivalent numbers for annual inflation to September 2024 are 2.1% for headline and 2.7% for core. As such, inflation is far lower than peak levels, but remains above the FOMC’s target.
Trends in house prices may help inflation return to target or below should shelter costs cool in 2025. However, this trend has been anticipated for some time, and has not yet appeared in the CPI data, though is evidence in some alternate price sources. The FOMC’s own September projections are relatively optimistic here, seeing inflation ending 2025 at 2.1% to 2.3%.
Jobs Data
Jobs data is likely more of a wildcard. For some time now the unemployment data has performed better than most expected. Yes, the job market has cooled and unemployment has risen from low levels, but this has not occurred at a pace to cause economic growth to stall. For example, Q3 Gross Domestic Product growth was reported at 2.8%.
In contrast, from March to July 2024 the unemployment rate rose relatively consistently from 3.8% to 4.3%. Extrapolating that trend caused some recession fears. However, since July unemployment has dropped back down to 4.1%. That recent trend builds more support for the idea that the U.S. economy will sustain a soft landing, with elevated interest rates not causing a recession.
Unemployment trends in 2025 will likely prove decisive for FOMC policy actions. If unemployment does trend up sharply then that will likely cause recession fears. Such fears could dominate any thinking about trying to squeeze the last percentage point out of the inflation rate. This might lead to more interest rate cuts than prevailing expectations, or at least interest rate cuts coming in at the lower end of current ranges.
However, should the unemployment rate remains relatively directionless, then the FOMC will have the luxury of being more attentive to inflation dynamics. Potentially, they could look to hold rates at a slightly higher level to try and achieve 2% inflation sooner.
What To Look For From the FOMC In 2025
If the jobs market were to weaken rapidly, causing recession fears to surface, then interest rates could end 2025 close to 3%. If the jobs market remained robust, the cuts are still probable, but rates will likely remain closer to 4% and more attention will be given to inflation trends. The path interest rates ultimately take will depend on incoming economic data. Still, it is most likely that interest rates continue to trend down from their current 4.% to 4.75% range, but the pace of that decline is in question for the year ahead.