Interest rates are expected to move lower in 2025. The question is: How much lower. There are two motivations for the Federal Open Market Committee to cut interest rates. These tie back to the FOMC’s dual mandate of price stability and full employment.
Inflation Is Coming Under Control
The first motivation is that inflation now appears under control. To fight inflation the FOMC raised interest rates sharply from 0% to 0.25% in January 2022, to 5.25% to 5.5% by July 2023. Now inflation is a lot lower. The FOMC monitors the Personal Consumption Expenditures Price Index as its preferred inflation metric. That indicator hit a 7.2% annual rate in June 2022 and is 2.2% for August 2024. As a result, the FOMC might be tempted to continue to remove the restrictive interest rates that were intended to fight inflation, a process that may have started with the FOMC’s first cut of this cycle in September 2024.
Of course, there’s always a risk that inflation flares up again, or that inflation doesn’t quite hit the FOMC’s 2% target. Still inflation is now much closer to the FOMC’s target than in recent years. Lower inflation suggests interest rates could move lower.
The Job Market Is More Ambiguous
The second motivation for interest rates is a little harder to gauge. It’s the risk that unemployment could move higher than the FOMC would like. Maintaining full employment is the other half of the FOMC’s dual mandate. In a sense, the FOMC wants to avoid a recession because of the job destruction that would likely result. In a recession, the FOMC might want to lower interest rates to stimulate the economy and create jobs.
Jobs data current appears to be more complex than inflation trends. Unemployment was steadily increasing for most of 2024, up until July when it hit 4.3%. That triggered some fears of a rise in unemployment that might prove sharp enough to cause a recession.
However, employment reports for August and September then showed unemployment moving lower with greater job creation, alleviating some concerns of an imminent recession. So far, the FOMC has expressed some confidence in the job market, though it continues to monitor data closely.
So from here, the issue is essentially how much the FOMC might want to lower interest rates given that inflation is now less of concern, and the job market could weaken.
The 2025 FOMC Meeting Schedule
Assuming no dramatic economic events, the FOMC will likely adhere to the following eight scheduled dates for determining interest rates in 2025: January 29, March 19, May 7, June 18, July 30, September 17, October 29 and December 10. Each of these decisions will be accompanied by a press conference with Federal Reserve Chair Jerome Powell. The meetings in March, June, September and December will also include an update to the Summary of Economic Projections from FOMC members. All meetings will also see detailed minutes released three weeks after the meeting.
The Interest Rate Outlook In 2025
FOMC policymakers’ own estimates of where short-term rates will be in December 2025 is, on average, a little more than 3%, with a median forecast of 3.4%. That forecast was updated at the FOMC’s last meeting on September 18. However, there are a broad range of forecasts across individual policymakers with rate levels from 2.75% to 4.25%. As such, every FOMC member is expecting lower rates, but assessments vary on how much they will decline.
Fixed income markets also implicitly project where interest rates are expected to trend. This is captured by the CME’s FedWatch Tool. These forecasts are broadly similar to the FOMC’s September projections, seeing rates at 3.25% to 3.5% as most likely for December 2025. Again there are a broad range of outcomes spanning from 2.5% to just above 4%. Therefore, fixed income markets agree that rates will most likely end 2025 just below 3.5%, but they see a range of outcomes that includes slightly lower rates than the FOMC’s own September estimates.
So, given current economic trends and data, expect short-term rates to end 2025 around 3.5%, representing substantial cuts from the current 4.75% to 5% range. This would largely reflect removing restrictive monetary policy given cooling inflation. However, the main question is the jobs market. If it remains robust then interest rates could perhaps stay closer to 4% and if it were to weaken substantially, rates could fall below 3%.