Federal Reserve policymakers are meeting this week and are expected to announce a decision on interest rates on Wednesday, likely leaving rates unchanged amid uncertainty over the economy and outlining how it will approach monetary policy over the rest of 2025.
Consumer prices remain stubbornly high with inflation in February at 2.8%, well above the Fed’s target of 2%, with tariffs threatening to keep prices elevated. While the labor market remains relatively stable, an economic slowdown triggered by a trade war or other shocks could undermine that.
Fed Chair Jerome Powell said after the central bank’s last policy meeting in late January that it’s in no hurry to cut interest rates, adding that policymakers will continue to monitor inflation and labor market data as they assess potential risks to both sides of its dual mandate to facilitate stable prices and maximum employment. The Fed cut rates by 50 basis points in September, followed by 25-basis-point cuts in both November and December, before leaving rates unchanged in January.
Though there is an elevated degree of economic uncertainty, the Fed’s anticipated actions this week are a foregone conclusion – meaning Fed watchers will be particularly attentive to the central bank’s projections for interest rates and indications about the timing of the next cut.
INFLATION SLOWED SLIGHTLY TO 2.8% IN FEBRUARY AHEAD OF FEDERAL RESERVE MEETING
The market sees a 99% probability that the Fed will leave the target for the benchmark federal funds rate unchanged at a range of 4.25% to 4.5% following its March meeting this week, according to the CME FedWatch.
Looking ahead, the market sees a 78% chance of the Fed leaving rates unchanged again in May with the next rate cut likely to fall in June, when the tool shows a 54.5% probability of a 25-basis-point cut. A second cut of that size has the highest probability in September.
By the end of 2025, the CME FedWatch tool shows a 32.2% probability of ending at two 25-basis-point rate cuts this year to a range of 3.75% to 4%; versus a 28.9% chance of a third cut to a range of 3.5% to 3.75%; and a 17.8% chance of just a single rate cut this year.
CONSUMER CONFIDENCE SLUMPS IN FEBRUARY WITH BIGGEST MONTHLY DROP IN NEARLY 4 YEARS
Analysts and economists have offered a variety of insights into their expectations for the Fed’s rate-cutting plans.
Comerica Bank chief economist Bill Adams wrote last week that it’s “hard to know how the Fed will react to the current situation. If the Fed makes monetary policy decisions based on policies enacted today, they could make substantial cuts to interest rates in 2025. On the other hand, if they assume that the overall fiscal stance will be more supportive of growth after factoring decisions likely to be made later in the year, they may reduce rates only a little if at all in 2025.”
“Comerica’s forecast sees the Fed learning toward the latter approach, with a single quarter percentage point interest rate cut in 2025, likely in July. Financial markets are pricing in a more aggressive pace of cuts from the Fed, though, with a first cut more likely than not by June and one half to three quarters of a percent in cumulative cuts by December,” Adams wrote. “In either case, the Fed will very likely be on hold in March as they wait for more information about recent policy shifts and how they’re affecting the economy.”
FED OFFICIALS FLAG RISING INFLATION RISKS AMID UNCERTAINTY OVER TRUMP POLICIES, TARIFFS
Goldman Sachs economists led by Jan Hatzius wrote that despite changes to their economic forecast due to trade policy uncertainty, they “have left our Fed forecast unchanged at two cuts this year and one more in 2026 to a terminal rate of 3.5%-3.75%.”
“We see two possible paths to interest rate cuts later this year. Normalization cuts back toward neutral are still possible, but probably only if tariffs fall well short of our expectations and inflation ends up lower than our forecast as a result,” the Goldman economists wrote. “The second, more plausible path to cuts if our tariff assumptions prove right is 2019-style ‘insurance cuts’ designed to guard against downside risks to the economy.”
They added that the “bar for insurance cuts will be higher than it was in 2019 because inflation is higher and some survey-based measures of inflation expectations, especially the Michigan series, have risen sharply.” That’s in part because the “growth risks posed by larger and broader tariffs are also considerably more serious than they were in 2019.”
Seema Shah, chief global strategist at Principal Asset Management, said: “We only expect two or three rate cuts this year given the continued focus on sticky inflation, but note that in the event of a more significant labor market deterioration the Fed would likely prioritize the full employment side of their dual mandate – introducing a more aggressive pace of easing.”
EY chief economist Gregory Daco said that EY views the Fed as likely to “maintain a wait-and-see approach over the coming months and expect only two Fed rate cuts in 2025, in June and December.”
“If the prevailing policy uncertainty worsens and market volatility rises further, this could lead to a vicious feedback cycle onto the economy and prompt some policymakers to consider easing monetary policy more,” Daco said. “However, we suspect many Fed officials will favor retaining a restrictive stance to prevent inflation reignition – especially if inflation expectations rise further.”
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