THE Federal Reserve cut rates by 25 basis points at its December 2024 meeting, bringing the federal funds rate to a target range of 4.25% to 4.5%. They signaled a slower pace for further rate cuts in 2025, expecting just two rate cuts, which would total a 50 basis point cut for the year. This is a reduction from their previous projections of four rate cuts in 2025. This adjustment reflects concerns about continued high inflation and the potential impact of incoming economic policies under a new administration.
The Fed engaged in quantitative tightening (QT), shrinking its balance sheet by not reinvesting all proceeds from maturing securities. QT is expected to end in 2024 or early 2025, reaching a point where reserves are taken into account. “ample” but not “abundant”. The decision to end QT will depend on when changes in reserve levels begin to more significantly affect short-term interest rates.
THE US Federal Reserve did not indicate plans to reduce zero rates in 2025; instead, the latest information suggests a more cautious approach to rate cuts. According to recent updates and projections:
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The Fed revised its outlook from three to two rate cuts for 2025, alongside an expected rise in inflation from 2.1% to 2.5%. This indicates a more hawkish stance compared to previous forecasts. Therefore, even if the Federal Reserve plans fewer rate cuts than expected, the notion of “zero rate cuts” for 2025 does not correspond to the available information. They still expect some level of rate adjustment to manage economic conditions.
Inflation expectations for 2025 vary across different sources, reflecting a range of economic scenarios and political impacts:
Federal Reserve Projections: The Federal Reserve has updated its projections and now expects core PCE inflation to be 2.5% for 2025, an increase from the previous forecast of 2.1%. This adjustment reflects concerns about potential inflationary pressures from policy changes, including those anticipated under the new Trump administration.
Market expectations: Forecast markets are currently signaling higher inflation expectations for 2025, with some forecasts suggesting inflation could reach 4.1%. This change from earlier expectations of a peak to 3.6% indicates growing concern about a reacceleration of inflation.
The Federal Reserve is preparing to review its “Statement on long-term objectives and monetary policy strategy” in 2025. This review will assess the effectiveness of the current framework, particularly in light of recent economic challenges such as supply chain disruptions and geopolitical tensions, which could lead to updates or adjustments of its approach to achieving its dual mandate of maximum employment and price stability.
Discussions are taking place around potential challenges to the independence of the Federal Reserve, particularly given the new administration’s historical views on monetary policy. This could impact how monetary policy is conducted, particularly regarding the Fed’s response to inflation and employment.
Consumer expectations: The University of Michigan survey shows 5-10 year inflation expectations at 3.3%, the highest since June 2008, suggesting consumers could expect more persistent inflationary pressures. Financial markets have adjusted their expectations, with less hope for aggressive rate cuts in 2025, which influences investment strategies and market volatility, particularly in bond markets where yields are sensitive to policy. the Fed.
Professional forecasters: According to the Blue-Chip survey, professional forecasters expect CPI inflation to slow slightly to 2.4% in 2025. This consensus is more optimistic than some market and consumer expectations, highlighting evidence a diversity of views on future inflation.
Economic outlook: Various economic forecasts from institutions like Goldman Sachs, Vanguard and the Congressional Budget Office (CBO) offer a range of inflation expectations for 2025, generally between 2.2% and 2.5%, influenced by factors such as tariff policies, immigration changes and labor market conditions. These changes and policy considerations reflect a nuanced approach by the Federal Reserve to address economic uncertainties, balance inflation control with employment goals, and maintain credibility in the face of potential political pressures.
International outlook: For countries outside the United States, such as Belgium, inflation is expected to fall below 2% in 2025, indicating a divergence in global inflation expectations. Overall, 2025 inflation expectations in the United States appear to remain high relative to the Federal Reserve’s long-term 2% target, with a variety of factors contributing to these expectations, including the political uncertainty and consumer confidence.
