Where are interest rates headed this year? The answer could be one that was unthinkable as recently as a month ago: Nowhere. Amid mixed economic data and uncertainty around the president-elect’s proposed tariffs, some analysts are now tempering expectations of multiple cuts in 2025.
In a surprising reversal, Bank of America wrote in a report this week that it now expects the Federal Reserve to keep its benchmark federal funds rate at its current range of 4.25% to 4.5% for an extended period. Previously, Bank of America forecasted two cuts of 25 basis points (a quarter of a percentage point) each in 2025.
The revision came after a couple of recent data releases showed a labor market in better shape — and inflation more stubborn — than economists anticipated. The better-than-expected December jobs report released Friday found that the economy added more than 250,000 jobs and unemployment fell to 4.1%.
On Wednesday, the consumer price index (CPI) for December was released, showing that annual inflation ticked up from 2.7% to 2.9%, which Bank of America economists characterized as “modestly above target” in a new research note. Plus, President-elect Donald Trump’s suggested tariffs on countries like Mexico and China would make prices on a wide array of goods go up if enacted, economists say.
These conditions point to the Fed taking more of a wait-and-see approach. Officials said as much on Wednesday after the CPI release. John Williams, the New York Fed president and voting member of the central bank’s rate-setting committee, said the economy is healthy. Williams added that the two parts of the Fed’s mandate — to support the labor market and to limit inflation from going above the 2% target — have returned to balance.
“Our job is to ensure the risks remain in balance,” he said in remarks at a conference in Connecticut. Inflation is still higher than policymakers want, and Williams said disinflation “will take time, and the process may well be choppy.”
After the strong jobs data for December, Chris Brigati, chief investment officer at financial services company SWBC, said the Fed might hit the brakes entirely. “We may very well see no rate cuts this year,” he said in a research note.
Timeline of recent Fed cuts
The Fed raised interest rates 11 times between March 2022 and July 2023 to fight inflation, bringing rates up to a range of 5.25% to 5.5%. The Fed held interest rates at that level for over a year, announcing a 50 basis point rate cut in September. The Fed has cut rates twice more since then.
Here is the timeline of recent interest rate cuts:
- September: 50 basis point cut
- November: 25 basis point cut
- December: 25 basis point cut
At 4.25% to 4.5%, rates are now a full percentage point lower than the recent high, but it’s unclear how much more cutting the Fed will do. In any event, interest rates aren’t likely to return to the near-zero levels of 2019 anytime soon, if ever. This means Americans will have to get used to rates on mortgages, auto loans, personal loans, student loans and credit cards remaining higher than they were just a few years ago.
How many interest rate cuts will there be in 2025?
In December, Fed officials expected to make two rate cuts in 2025, according to the “dot plot,” which shows where officials think rates are headed. However, at one point in September, Fed officials were expecting four cuts.
Since the release of the last dot plot, the odds of multiple cuts in 2025 appear to have decreased further. According to the CME Group’s FedWatch Tool, the market now expects one rate cut by June, but the probability of an additional rate cut beyond that is closer to 50/50.
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According to a recent report from Money.com, the Federal Reserve may not be making any changes to interest rates this year. This is a surprising reversal from previous expectations of multiple cuts in 2025. Bank of America, which previously forecasted two cuts of 25 basis points each, now predicts that the Fed will keep its benchmark federal funds rate at its current range of 4.25% to 4.5% for an extended period.
This change in forecast comes after recent data releases showed a stronger labor market and higher inflation than expected. The December jobs report showed that the economy added over 250,000 jobs and unemployment fell to 4.1%. Additionally, the consumer price index for December showed an annual inflation rate of 2.9%, which is slightly above the Fed’s target of 2%. The proposed tariffs by President-elect Donald Trump could also contribute to higher prices if enacted.
As a result, the Fed may take a more cautious approach and wait to see how these factors play out before making any changes to interest rates. This sentiment was echoed by New York Fed president John Williams, who stated that the economy is currently in a healthy state and the Fed’s job is to ensure that risks remain balanced.
Some experts, such as Chris Brigati, chief investment officer at SWBC, believe that there may not be any rate cuts this year. The Fed has already raised interest rates 11 times between 2022 and 2023 to combat inflation, but has since cut rates three times, with the most recent cut in December 2025.
Overall, it remains to be seen how the Fed will respond to the current economic conditions, but it is clear that they are taking a more cautious approach in light of recent data and uncertainties.
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