When might be a good time for the Fed to lower interest rates this year, to paraphrase a well-known New Yorker cartoon? March? June or May? What if we never made any cuts during the year?
While some analysts believe the Federal Reserve under Chair Jerome Powell will not ease again until 2026, others said Wednesday that the cutting cycle is over.
Following their meeting on Wednesday, Fed officials decided to keep interest rates between 4.25% and 4.5%. Fed officials had planned two quarter-point rate cuts for 2025 in December.
Also read: Powell adopts a wait-and-see stance on interest rates, prompting Trump to react angrily
Powell stated that the Fed was in “no hurry” to lower interest rates when asked about its plans at his news conference. He went on to say that before making more cuts, the Fed wants to see greater progress on inflation or a declining job market.
Powell’s two requirements for a cut are not likely to be fulfilled, according to economists who predict the Fed will stop cutting.
According to GlobalData TS Lombard chief U.S. economist Steven Blitz, there won’t be any reduction in 2025.
The U.S. economy is expected to grow at a 3% annual rate this year, according to Blitz, which is significantly higher than the “trend” growth rate of 2%. He predicted that eventually, this increased demand would drive inflation higher.
According to James Egelhof, chief U.S. economist at BNP Paribas, tariff increases, stricter immigration laws, and an ongoing loose fiscal policy will cause inflation to increase over 2025. Another aspect, he said, is somewhat elevated long-term inflation expectations.
“We remain comfortable with our now-longstanding call that the FOMC will keep rates on hold through mid-2026,” Egelhod stated.
Additionally, U.S. economist Aditya Bhave of BofA Global Research stated that he believes the Fed’s cutting cycle is over.
“The fact that March does not appear to be Powell’s base case supports our view,” Bhave stated. “And the Fed rarely moves at a slower-than-a-quarter cadence in either direction,” he stated, adding that a move in March would mean no cuts in the first quarter.
More: At this time, stocks are more in need of this than they are of another Fed rate cut.
The Fed isn’t far from its objective of a neutral policy stance, which he sees at about 3.75%, according to Matthew Luzzetti, chief U.S. economist at Deutsche Bank.
According to him, there is a base case for no additional rate cuts because the Fed has to maintain a slight increase above that rate this year.
Derivative market activity suggests that traders continue to anticipate cuts this year, with a quarter-point decrease in June and another cut in the fall.
But is a trek really the next step?
According to Blitz, rate increases will start to be priced into the market in 2026.
Although an increase is not completely out of the question if inflation picks up speed again, Jim Baird, chief investment officer at Plante Moran Financial Advisors, said that Trump’s tariff threats would cause the Fed to reverse course in the near future.
Indeed, a lot of economists believe that the Fed has essentially controlled inflation and that further rate reduction are on the horizon. However, there is a general feeling of uncertainty.
According to KPMG US senior economist Diane Swonk, the Fed’s policy is in “a sort of policy purgatory.”
“The Fed doesn’t know what is next, given the uncertainty surrounding the new administration’s agenda,” she stated.
Morgan Stanley has one of Wall Street’s most unconventional forecasts, anticipating a cut in both March and June. According to strategists led by Matthew Hornbach, “we expect more investors to accept the idea of a March rate cut if inflation makes further progress toward 2%.”
