Why Financial Markets Are Losing Hope for a 2025 Fed Rate Cut | Global News Avenue

The economy has been running faster than expected recently, raising the possibility that the Federal Reserve will keep interest rates higher for longer and may not cut rates in 2025 as policymakers predict.

In recent weeks, every new piece of economic data has poured cold water on hopes in financial markets that the Federal Reserve will reduce its influence. federal funds rate 2025, as it has done in the last three meetings since September. As of Wednesday, financial markets priced in a 15% chance that the Fed would not cut interest rates next year, up from 4% a month ago, according to CME Group’s FedWatch tool, which predicts interest rate trends based on the Fed’s interest rate trends. Fund futures trading data.

In an effort to curb inflation, the Fed kept key interest rates at a two-decade high in the year to September. Thereafter, the Central Bank Policy Committee Lower interest rates by a full percentage point Over the course of three meetings.

Fed officials said interest rates remain within a “restrictive” range, currently at 4.25%-4.5%. That means it pushes up interest rates on all types of loans, discouraging borrowing and spending, slowing the economy and dragging down inflation.

Inflation is down from its highest level in 40 years set in 2022 and is slightly above the Federal Reserve’s annual target of 2%. However, Progress has stalled in recent months. And, recent economic data suggests it could take a long time to get back to pre-pandemic levels.

James St. Aubin, chief investment officer of Ocean Park Asset Management, wrote in comments: “Despite the slowdown, inflation remains stubbornly above 20%, driven by factors such as housing costs and auto insurance. Fed’s Target. “Persistent inflation could force the Fed to maintain restrictive monetary policy for longer than expected, which could impact economic growth and market valuations.”

The unknowns of the future

The Fed uses its benchmark interest rate as its primary tool to achieve its twin goals of controlling inflation and avoiding job market turmoil. Inflation has remained above the Fed’s target in recent months, and unemployment has remained low even as employers have cut back on hiring.

This week, new government data shows employers Create more positionsthere are currently no signs of large-scale layoffs. A separate report on non-manufacturing from the Institute for Supply Management showed services sector prices rose in December, raising fresh concerns that inflation may be reigniting.

Both factors could force the Fed to delay further rate cuts.

However, the trajectory of the economy can shift in an instant, and some economists believe Warning signs in labor market data This suggests that hiring may not be as elastic as it seems. Trump’s tariff policy is another major variable: Import taxes could push up inflationan economic slowdown, or both, the impact could depend on which and how the Trump administration implements the tariffs he has promised.

Have predictions come true?

Ahead of the latest round of data, Fed officials Expected to be cut by just half a percentage point 2025, down from the previous forecast in September. Minutes of the Fed’s policy committee’s most recent meeting in December, released on Wednesday, confirmed that officials were increasingly concerned about inflation and increasingly reluctant to cut interest rates, even before the latest round of data.

“September’s half-percentage point rate cut has consumers hoping their debt burdens can be reduced quickly, but reports suggest Fed officials are in no hurry to cut rates further,” said Robert Frick, corporate economist at Navy Federal Credit Union. Frick) wrote in the comments.

Deutsche Bank economists and others predict that the Fed will not cut interest rates at all in 2025.

“The Bundesbank’s view after the election two months ago was that the Fed would have to stay on hold throughout the year,” Jim Reid, a research strategist at the bank, wrote in a commentary. “Markets are pricing in this view. ”

Update, January 8, 2024: This article has been updated to include information from the minutes of the Federal Reserve’s December meeting.