Market Perspectives on the Federal Reserve's Last Four Monetary Policy Decisions in 2025
**Expected Federal Reserve Interest Rate Cuts in 2025**
The Federal Reserve, the US central banking system, is expected to implement interest rate cuts in the second half of 2025, according to the Fed's median projection. The anticipated cuts are aimed at supporting economic expansion and maintaining inflation at about 2% over the long run, the Fed's monetary policy objectives.
**Timeline**
The Federal Reserve is projected to make two quarter-point rate cuts this year, as per the median forecast. Another forecast suggests a total cut of 0.50 percentage points across two cuts in 2025. Beyond 2025, further cuts are anticipated in 2026 and 2027, with each year seeing a reduction of 0.75 percentage points.
**Reasons**
The US economy is expected to grow at a slower rate in 2025 compared to previous years, partly due to slower consumer spending growth relative to income. Lower tariffs and decreased economic uncertainty may support some business investment. Despite inflation remaining somewhat elevated, the Fed is cautious about cutting rates due to potential future inflation spikes influenced by tariffs. However, inflation is expected to be mild, allowing for a dovish monetary policy approach.
**Implications for Economy and Monetary Policy**
Lower interest rates can stimulate economic growth by making borrowing cheaper, which can help businesses and consumers invest more. However, the effectiveness of these cuts depends on the overall economic conditions and consumer confidence. The Fed's decision to cut rates reflects its assessment of economic risks and its commitment to supporting economic activity. The cuts will influence long-term interest rates, such as mortgage rates and Treasury yields, potentially affecting housing and capital markets.
The anticipation of rate cuts can influence market expectations, potentially affecting asset prices and investment decisions. However, the actual impact on markets will depend on how the cuts are perceived relative to economic conditions.
**Notable Developments**
On June 18, 2025, the FOMC policymakers shared their interest-rate projections for 2025. The FOMC last cut rates in December 2024. In May 2025, the Consumer Price Index rose 2.4% on an annual headline basis, and 2.8% without food and energy price trends. Federal Reserve Chair Jerome Powell stated that the Fed is "well positioned to wait to learn more about the likely course of the economy before considering any adjustments to our policy stance."
President Trump has been critical of Federal Reserve Chair Jerome Powell and will nominate his successor to lead the Federal Reserve from early 2026. President Trump has called for lower interest rates to reduce the cost of servicing the national debt. However, Powell has stated that such statements from Trump have no impact on monetary policy.
The FOMC's focus on full employment indicates that the job market has been robust for 2025 so far. Inflation has shown evidence of trending towards the FOMC's 2% annual target since February 2025. The FOMC policymakers' projections will be updated on September 17, 2025. Interest rates are expected to move lower later in 2025, with a possible first cut in September and at least one more cut to follow.
Despite robust jobs data, some policymakers fear that tariffs could cause the job market to weaken in the future. Markets expect interest rates to be cut at least once in 2025. The FOMC is awaiting June's CPI report to assess any potential change in the inflationary impact of tariffs in the coming months. Tariffs are being watched for any potential inflationary impact, but up to May's CPI report, their impact appears mild.
The Fed Chairman, Jerome Powell, stated that the Federal Reserve is "well positioned to wait to learn more about the likely course of the economy before considering any adjustments to our policy stance," hinting at the upcoming next Fed meeting. As the FOMC policymakers have projected interest rate cuts later in 2025, these cuts could influence finance and investing decisions, particularly in the housing and capital markets.
