The U.S. Federal Reserve is likely to cut interest rates three times in 2025 as inflationary pressures ease and the labor market remains balanced, according to Wolfe Research analysts.
A slew of economic data released earlier this week showed an unexpected rise in jobless claims and still-high inflation. The reading, released ahead of the crucial U.S. monthly jobs report this weekend, reinforced expectations that the Fed will take a cautious approach to any rate cuts in 2025.
However, the data showed the jobless claims ratio remained at 1.1 jobs for every unemployed person in November, signaling that the previously buoyant U.S. labor market is “returning to a more balanced state,” Wolfe Research analysts said in a note to clients on Wednesday.
As a result, while near-term strength in job demand is expected to keep the Fed’s borrowing cost cut expectations this year at between one and two, they still think the central bank will opt for a third cut by December.
Investors now expect the Fed to cut borrowing costs by 37.5 basis points by the end of the year, with the first cut not expected to take full effect until July, Reuters reported.
Fed policymakers recently signaled caution about further rate cuts after a decision to cut borrowing costs by a quarter of a percentage point at their December meeting. Minutes from that meeting are expected to provide more clues on Thursday about how policymakers will approach further cuts, especially as the Trump administration’s upcoming massive tariff plan adds uncertainty to the overall economic outlook.
So far, uncertainty over Trump’s proposals on trade and taxes has led some policymakers to consider future rate cuts as if they were “driving in a foggy night or walking into a dark room full of furniture,” Fed Chairman Jerome Powell said in December.
After last month’s meeting, projections show Fed officials now expect just 50 basis points in rate cuts this year. In September, the estimate was for a full percentage point cut.
