Tuesday, December 3, 2024

Wall Street sees ‘slower’ pace of Fed rate cuts in 2025

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Markets widely expect the Federal Reserve to cut interest rates for the fourth time this year at its December meeting. The question is what the central bank will do next year.

Recent sticky inflation prints and evidence the US economy is growing at a solid pace have raised doubts that the Fed will bring down rates as quickly as it previously indicated. In September, the Fed’s Summary of Economic Projections (SEP) projected four interest rate cuts next year.

Read more: What the Fed rate cut means for bank accounts, CDs, loans, and credit cards

Markets are currently projecting roughly two cuts in 2025, per Bloomberg data. The Fed is scheduled to release an updated forecast on Dec. 18.

While they differ on the specifics, Wall Street economists generally agree that the central bank’s current rapid pace of rate cuts won’t continue.

“As we head into 2025, we’re likely to see a slower pace of cutting going forward, where the Fed likely moves to an every other meeting sort of pace,” Wells Fargo senior economist Sarah House, whose team sees three interest rate cuts in 2025, said during a media roundtable on Nov. 21.

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At a current range of 4.5% to 4.75%, there’s little debate over whether the fed funds rate is restrictive. This has prompted many economists to believe further easing is likely in the pipeline as the Fed continues to aim for a “soft landing” where inflation falls to its 2% target without a significant downturn in the economy.

With the US economy growing at a solid pace and concerns of a labor market slowdown on the back burner for now, the sticking point in the debate is just how much the Fed will lower rates over the next year without seeing significant improvement in inflation data.

Deutsche Bank chief US economist Matthew Luzzetti sees the Fed cutting once more in December before pausing its interest rate adjustments for all of 2025 as it waits for more progress on the inflation front.

“There’s a lot less urgency to cut rates,” Luzzetti told Yahoo Finance. “It might make sense to slow the pace of rate cuts earlier than they expected.”

In recent months, inflation’s progress toward the Fed’s 2% target has “stalled,” Fed governor Michelle Bowman said in a recent speech when making the case for the central bank to proceed “cautiously” with rate cuts.

The latest reading of the Federal Reserve’s preferred inflation gauge showed price increases were flat in October from the prior month. On Wednesday, the core Personal Consumption Expenditures (PCE) index showed prices increased 2.8% from the year prior in October, well above the Fed’s goal.

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