1. Executive Summary
This report aims to analyze and forecast the potential interest rate cuts that the Federal Reserve may implement in 2025. The report examines the current economic conditions, the Fed's policy stance, and forecasts from major financial institutions and economists. By analyzing key economic indicators such as inflation rates, economic growth rates, and employment data, this report summarizes the general consensus and range of predictions regarding the timeline for rate cuts in 2025. Currently, the U.S. economy faces multiple uncertainties, including ongoing inflationary pressures, potential economic growth slowdown, and the impact of new government trade policies. In this context, the direction of the Fed's monetary policy is under close scrutiny, and expectations for rate cuts in 2025 will directly affect financial markets and economic activity.
2. Current Economic Conditions and Fed Policy (As of March 2025)
At the Federal Open Market Committee (FOMC) meeting in March 2025, the Fed unanimously voted to maintain the federal funds rate at 4.5%. This is the second consecutive meeting to keep rates unchanged following a pause in January 2025. Previously, the Fed cut rates three times from September to December 2024, totaling a reduction of 1 percentage point. This pause in rate cuts indicates that the Fed is in a phase of assessing economic conditions and awaiting more policy impacts to materialize.
Meanwhile, the Fed released its latest economic forecasts at the March meeting. Compared to the December 2024 forecast, the Fed has lowered its projection for U.S. GDP growth in 2025 from 2.1% to 1.7%, suggesting that economic activity may be more subdued than previously expected. On the other hand, the Fed raised its forecast for the core inflation rate (excluding food and energy prices) at the end of 2025 from 2.5% to 2.8%. Additionally, the forecast for the unemployment rate at the end of 2025 was also slightly raised from 4.3% to 4.4%. These adjustments partly reflect the impact of recent tariff policies implemented in the U.S. and their potential trade retaliation effects.
Notably, the Fed also announced that it will further slow the pace of quantitative tightening in April 2025, reducing the monthly redemption cap for U.S. Treasury bonds from $25 billion to $5 billion. This move indicates that while the Fed is gradually tightening monetary policy, it is also trying to avoid causing too much disruption to financial markets. Despite economic forecasts showing slowing growth and rising inflation, the Fed still expects to implement two rate cuts in 2025, consistent with the December forecast. However, compared to last month, the number of FOMC members who believe that more than two rate cuts are needed has decreased, while the number of members who believe that no rate cuts are necessary has increased. This reflects a high degree of uncertainty about the economic outlook and differing views within the Fed regarding the future policy path.
3. The Federal Reserve's Forecasts and Stance
According to the Federal Open Market Committee meeting held on March 18-19, 2025, participants submitted their forecasts for the most likely outcomes for real GDP growth, unemployment rates, and inflation from 2025 to 2027 and over the long term. These forecasts reflect the personal assessments made by FOMC members and Federal Reserve Bank presidents based on their assumptions about appropriate monetary policy.
Table 1: Economic Projections of the Federal Open Market Committee Members (March 2025)
Indicators
Median
Central Trend
Range
Federal Funds Rate (End of Year)
3.9%
3.9%-4.4%
3.6%-4.4%
GDP Growth Rate (Year-on-Year Change)
1.7%
1.5%-1.9%
1.0%-2.4%
Unemployment Rate (Fourth Quarter)
4.4%
4.3%-4.4%
4.1%-4.6%
PCE Inflation Rate (Year-on-Year Change)
2.7%
2.6%-2.9%
2.5%-3.4%
Core PCE Inflation Rate (Year-on-Year Change)
2.8%
2.7%-3.0%
2.5%-3.5%
Compared to the forecast from December 2024, this forecast has lowered the median GDP growth for 2025 from 2.1% to 1.7%, raised the median unemployment rate from 4.3% to 4.4%, and raised the median PCE inflation rate from 2.5% to 2.7%, with the median core PCE inflation rate also raised from 2.5% to 2.8%. These adjustments indicate a more conservative expectation for economic growth in 2025 from the Fed, while concerns over inflation have increased. Nevertheless, as previously mentioned, the Fed's forecast in March 2025 still maintains the expectation of two rate cuts in 2025 (a total of 50 basis points), consistent with the December forecast. This indicates that despite the uncertainties in the economic outlook, the Fed still leans toward a moderate easing policy within the year. However, due to adjustments in economic forecasts and differing opinions within the FOMC on the number of rate cuts, future policy paths remain variable.
4. Predictions from Financial Institutions' Experts
Experts from multiple financial institutions have made predictions about the Fed's interest rate trajectory in 2025, with varying opinions.
J.P. Morgan's strategists expect the Federal Reserve to gradually ease monetary policy later in 2025, possibly starting with two rate cuts in June. They believe that, although inflation remains high, there are signs of easing, with the core consumer price index rising 2.6% year-on-year in January 2025, down from 3.1% in January 2024, gradually approaching the Fed's 2% target. Additionally, they note that the Fed's own economic forecasts show that GDP growth will slow to 1.7% in 2025, core inflation will rise to 2.8%, and the unemployment rate will slightly increase to 4.4%. J.P. Morgan believes the Fed is currently in a wait-and-see mode to assess the impact of the Trump administration's new policies on the economy, including tariffs and potential trade retaliation. Fed Chairman Powell has also acknowledged that tariffs could lead to rising inflation and delay the timeline for inflation to return to the 2% target.
Morningstar's forecast is more optimistic, as they expect the Fed will implement three rate cuts in 2025, lowering the target range for the federal funds rate to 3.50%-3.75% by the end of the year. Morningstar believes that inflation will drop from an average of 2.5% in 2024 to 2.2% in 2025, essentially returning to normal levels, averaging 2.0% during the period from 2025 to 2029. Meanwhile, they expect GDP growth to slow from 2.8% in 2024 to 2.0% in 2025 and 1.7% in 2026. Morningstar believes that declining inflation and slowing economic growth will prompt the Fed to take more aggressive rate-cutting measures.
Goldman Sachs has recently also lowered its forecast for U.S. GDP growth in 2025 to 1.7%, closely aligning with the Fed's forecast. They now expect the Fed to implement three rate cuts in 2025, an increase from the previously predicted two. Goldman believes that President Trump's tariff policies pose a greater risk to economic growth and has raised the likelihood of the U.S. economy entering a recession within the next 12 months to 35%. They expect that in response to the downside risks posed by tariffs, the Fed may adopt similar 'insurance-style' rate cuts as it did in 2019.
5. Economists' Views on Interest Rate Trends
In addition to forecasts from financial institutions, some economists have also expressed their views on interest rate trends in 2025.
Stephen Brown, an economist at Capital Economics, believes that due to inflation remaining persistently above target levels, it is unlikely that the Fed will cut rates in 2025. He notes that although the consumer price index has decreased, core inflation remains stubbornly high, making it difficult for the Fed to quickly lower its key interest rates.
Raphael Bostic, president of the Atlanta Federal Reserve Bank, stated that due to significant fluctuations in the U.S. economy caused by the Trump administration's policies, the Fed may need to wait until late spring or summer 2025 to clearly assess the economic situation and adjust interest rates. He emphasized various uncertainties related to tariffs, trade policies, inflation, immigration policies, and more, which complicate the Fed's ability to act preemptively.
Deutsche Bank economists are more hawkish, predicting that the Fed will not implement any rate cuts in 2025. They believe that inflation will remain persistently high, and Trump's policies may further elevate inflation, making it less likely for the Fed to shift to an accommodative monetary policy.
6. The Impact of Key Economic Indicators
The Fed closely monitors a range of key economic indicators when formulating monetary policy. These indicators include:
● Inflation Rate: The Fed's goal is to maintain the inflation rate around 2%. Currently, although inflation has retreated from its peak in 2022, it still remains above this target. In January 2025, the Fed's preferred inflation measure—the Personal Consumption Expenditures (PCE) price index—rose 2.4% year-on-year, and the core PCE price index increased by 2.8% year-on-year. Persistently high inflation above the target will limit the Fed's room to cut rates.
● Employment Data: Another important goal of the Federal Reserve is to achieve full employment. The current job market remains strong, with the unemployment rate at 4.1% in February 2025. A strong job market typically indicates a well-functioning economy, which may reduce the urgency for the Fed to cut rates. However, the Fed's projections indicate that the unemployment rate may slightly rise to 4.4% by the end of 2025.
● Economic Growth Rate: GDP is the broadest measure of economic activity. The Fed hopes for sustainable economic growth while avoiding overheating that leads to inflation. The Fed has lowered its GDP growth forecast for 2025 to 1.7%. A slowdown in economic growth may prompt the Fed to cut rates to stimulate economic activity.
● Conditions in the Financial Market: The Fed will also pay attention to the stability and functioning of the financial markets, as volatility in the financial markets can affect economic activity.
7. The Impact of Tariffs on Monetary Policy
The tariff policies of the Trump administration are an important factor influencing the Fed's monetary policy in 2025. It is widely expected that tariffs will lead to rising consumer goods prices, thereby pushing inflation higher, known as 'tariff-driven inflation.' Higher inflation may limit the Fed's ability to cut rates, even if economic growth slows.
Additionally, tariffs and trade retaliation measures may lead to slowing economic growth and negatively impact business and consumer confidence. If tariffs significantly suppress economic activity, the Fed may be forced to cut rates to provide support, even if inflation remains high.
The Fed itself has also acknowledged the uncertainties brought about by these policies. Their current 'wait-and-see' attitude reflects this uncertainty, suggesting they may delay any significant policy adjustments until the economic impacts of tariffs become clearer. However, Goldman Sachs believes that the increased risks from tariffs may prompt the Fed to take 'insurance-style' rate cuts to address potential economic downturn risks.
8. Market Expectations and Probabilities
Market indicators such as CME Group's FedWatch tool are widely used to gauge investor expectations for the timing of rate cuts in 2025. As of the end of February 2025, the FedWatch tool shows that the market expects a high probability of at least two rate cuts by December 2025, with most believing the first cut could occur at the meeting on June 18.
Table 2: CME FedWatch Tool Rate Probability Forecast for 2025 FOMC Meetings (As of March 31, 2025)
Meeting Date
Target Rate 4.00%-4.25%
Target Rate 4.25%-4.50%
Target Rate 3.75%-4.00%
Target Rate 3.50%-3.75%
Target Rate 3.25%-3.50%
Target Rate 3.00%-3.25%
May 7
16.8%
83.2%
-
-
-
-
June 18
67.7%
19.4%
12.9%
-
-
-
July 30
33.6%
5.7%
51.6%
9.1%
-
-
September 17
15.2%
1.9%
39.7%
37.2%
6.0%
-
October 29
9.9%
1.2%
29.9%
38.2%
18.4%
2.4%
December 10
5.7%
0.6%
20.4%
34.3%
27.9%
10.0%
Please note that market forecasts can change rapidly based on new economic data and the Fed's communications. Additionally, the dot plot released by the Fed in March 2025 indicates that the federal funds rate will decline by 50 basis points by the end of 2025 and another 50 basis points by the end of 2026. This aligns with the Fed's own forecast of two rate cuts in 2025.
9. Conclusion: Comprehensive Projections and Key Uncertainties
Overall, the market currently widely expects the Fed to implement some degree of rate cuts in 2025, but there are differences regarding the frequency and specific timing of the cuts. The Fed's own forecasts and J.P. Morgan's expectations both point to two rate cuts within the year, while Morningstar and Goldman Sachs expect three cuts. At the same time, some economists believe that due to ongoing inflation pressures, the Fed may not cut rates in 2025, or at least will delay the timing of the first cut until the second half of the year.
Key uncertainties affecting the Fed's ultimate decision include:
● The Direction of Inflation: Particularly the potential impact of Trump administration's tariff policies on prices.
● The pace of economic growth and the strength of the job market: Whether the economy will slow as expected and whether there will be significant weakness in the job market.
● Specific details of the Trump administration's trade and fiscal policies and their economic consequences.
● Possible unexpected economic shocks or global events.
Given these uncertainties, the Fed is likely to adopt a data-dependent strategy, with future rate decisions closely monitoring incoming economic data and evolving market conditions. For businesses and investors, it is advisable to remain cautious and continuously monitor economic data and the Fed's communications to timely adjust investment and operational strategies.
