Anticipated Timeline for Fed's Next Interest Rate Reduction
New and Improved Outlook on Interest Rates
Brace yourself for the potential interest rate cut coming our way in June, as hinted by fixed income markets. The Federal Open Market Committee (FOMC) has kept things steady at their meetings in January and March, but it seems they might be ready to make a move.
However, the FOMC sees quite a bit of uncertainty in the economic outlook. Policymaker forecasts indicate an average of two cuts in 2025, as updated on March 19. It's important to note that, despite the average expectation of two cuts remaining the same, the range of outcomes from policymakers is now skewed towards fewer cuts compared to December projections. Interest rate cuts could happen if inflation cools further and the jobs market stays robust.
Federal Reserve Chair Jerome Powell has addressed the issue of inflation in his March 19 press conference. "Some near-term measures of inflation expectations have recently moved up," Powell stated. Yet, beyond the next year or so, most measures of longer-term expectations remain consistent with the Fed's 2 percent inflation goal.
These rising fears of a recession, which have increased somewhat based on survey data, might also trigger rate cuts. Despite these recession fears, reported economic data has been pretty positive overall. Forecasting site Kalshi puts the chance of a 2025 recession at 36%.
Powell didn't necessarily suggest that interest rate cuts are imminent at his March 19 press conference. Instead, he stressed considerable economic uncertainty. Without hints that a cut is coming at the next meeting, fixed income markets give only a 16% chance of a May 7 cut in interest rates.
There's a notable difference between the markets' view and that of the FOMC on the range of interest rate outcomes for 2025. Markets are confident that the FOMC will cut interest rates by June 18, but the FOMC sees two cuts as the most likely scenario for the whole year, with a few fewer cuts possible.
All this said, much will depend on how economic data plays out in the coming months. With assessments of economic uncertainty at record highs compared to recent history, the Fed will have to carefully monitor and evaluate the data before making their moves.
In addition to the factors mentioned above, rising tariff levels, possible government spending cuts, and immigration policies could also impact the economy. These factors could lead to supply chain disruptions, reduced labor supply, and other challenges that may affect consumer confidence.
However, the jobless claims remain consistent with levels from the past two years, and the unemployment rate is within a narrow band since May 2024, maintaining 4.1% in February.
In sum, the FOMC is projecting two interest rate cuts for 2025, with the first potentially arriving in June. However, economic uncertainty is high, and the fixed income markets see a reasonable chance of deeper interest rate cuts. As ever, the Fed's actions will be data-dependent, but this has never been more true than in the coming months, as there's considerable divergence among economic forecasts.
Bonus Facts:- The Federal Reserve targets an inflation rate of 2% and aims to balance employment and inflation objectives.- Market volatility and geopolitical concerns contribute to the Fed's cautious stance.- Alternative policy tools such as Quantitative Easing (QE) or adjusting the pace of Quantitative Tightening (QT) might be considered to stimulate the economy without cutting interest rates if needed.
- The Federal Reserve predicts an average of two interest rate cuts in 2025, as mentioned by the FOMC, with the first potential cut expected in June.
- Economic uncertainty and rising fears of a recession may push the Federal Reserve to make deeper interest rate cuts, according to the fixed income market predictions.
- Federal Reserve Chair Jerome Powell has acknowledged the uncertainty in the economic outlook, stating that some measures of inflation expectations have moved up, but most longer-term expectations remain consistent with the Fed's 2% inflation goal.
