The Federal Open Market Committee is highly likely to hold interest rates at their current level of 4.25% to 4.5% for January according to fixed income markets. That next interest rate decision will come on January 29, 2025. It will be the first of eight scheduled meetings for 2025. More interest rate cuts are expected in 2025, but at a measured pace.
Holding Rates Steady Expected
Holding rates steady is likely because the FOMC believes they have now cut rates sufficiently to account for recent disinflation from elevated levels, but they don’t want to cut too much when inflation remains above their 2% target.
Though more rate cuts are expected in 2025, the FOMC may proceed at a slower pace as they monitor inflation and unemployment. Inflation remains above the FOMC’s 2% goal and unemployment is not a major concern currently. As a result, the FOMC would prefer to see inflation trending to 2% before further cuts.
Recent inflation reports have shown some marginal acceleration in inflation, something the FOMC would like to minimize. For example, Federal Reserve Governor Lisa Cook, said “Price increases have cooled notably over the past two and a half years, but, despite this significant progress on disinflation, there is still further to go before reaching our inflation target of 2 percent,” at a speech on January 6.
More Interest Rate Cuts Likely, But Not Imminent
However, markets do expect the FOMC to cut again, just not in January. For example, later in her recent speech, Cook continued. “All along, I envisioned moving more quickly in the early stages of our easing campaign and then easing more gradually as the policy rate came closer to neutral. In addition, since September, the labor market has been somewhat more resilient, while inflation has been stickier than I assumed at that time. Thus, I think we can afford to proceed more cautiously with further cuts.”
The market’s forecast is that another cut is expected in the first half of 2025, perhaps as soon as March or as late as July. The timing will depend on how the FOMC interprets upcoming economic news, including January’s inflation report and unemployment data.
Economic Data
Broadly, if inflation moves closer to 2% over the coming months, that may encourage the FOMC to cut interest rates a little faster or deeper. However, nowcasts suggest that inflation could remain sticky around current levels. Equally, were the job market to weaken that could prompt the FOMC to cut rates with greater force. So far the job market has been more robust that expected, despite inflation moving up. History shows that the unemployment situation can change quickly.
The FOMC did update their economic projects at the December meeting, so January will not see much additional disclosure beyond Fed Chair Jerome Powell’s press conference. The next update to the FOMC’s public forecasts will come at the scheduled March meeting. The FOMC appears unlikely to cut in January, but more color may be provided on when future cuts could land because monetary policy remains somewhat restrictive today.
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