- Fed considers only two rate cuts in 2025
- Powell highlights uncertainties in economic projections
- Wall Street weighs possibility of rate hike
As 2025 approaches, the Federal Reserve faces significant dilemmas that could directly impact the U.S. economy. Led by Jay Powell, the institution is discussing the future of interest rates in a scenario influenced by President Trump’s fiscal policies, which include new tax and tariff plans.
In a previously unanticipated move, the Federal Reserve indicated in December that it would see just two 25 basis point rate cuts this year, defying expectations for four. The revision suggests a more cautious approach from the central bank in response to the current economic environment.
During a press conference, Jay Powell commented on the updated economic projections, stating that “some people took a very preliminary step and started to incorporate highly conditional estimates of the economic effects of policies into their forecasts at this meeting and said so at the meeting.” This comment highlights the uncertainty that still permeates the Fed’s monetary policy decisions.
As Trump’s second term progresses, the Federal Reserve’s stance remains a crucial point of interest. While today’s meeting is widely expected to be a quiet affair, with no imminent change in interest rates, Wall Street economists are already mulling future scenarios. According to Bank of America analysts, “Our baseline scenario is for the Fed to be on extended hold… But we think the risks to the next move are tilted to the upside.”
In contrast, Jonathan Millar and his team at Barclays evaluate that a shift to interest rate hikes would only occur with convincing evidence that the Fed is not meeting its 2% inflation target over the medium term, which extends to 2027. They also note that transitions from interest rate cuts to hikes require clear signs of overheating in both demand and supply indicators, and that such shifts are signaled well in advance of their occurrence.
Despite the caution, Wall Street research isn't just about predicting Fed moves, it's also answering questions from clients, helping them navigate an economic environment rife with uncertainty due to factors like AI trade and Trump's tariff agenda.
While this week's meeting may seem trivial to some, it represents a pivotal moment for investors seeking to understand not only the Federal Reserve's future policies, but also how those decisions will shape financial markets in the years to come.