Fed Expected to Slow Down on Rate Cuts in 2025

The Federal Reserve is expected to adopt a more gradual approach to interest rate cuts in 2025, influenced by persistent inflation and robust economic growth. In September, Fed officials anticipated four rate reductions in 2025; however, recent economic indicators suggest that only two or three cuts may occur. 

Chair Jerome Powell emphasized the need for caution, stating that the current economic strength allows for a measured pace in policy adjustments. This cautious stance is due to inflation remaining above the Fed's 2% target, with core inflation—the measure excluding food and energy costs—holding steady at approximately 2.8% since March. 

The Fed's benchmark interest rate, which influences various consumer and business loans, is projected to decrease to about 4.3% following a quarter-point cut in December. This rate is significantly higher than the estimated "neutral" level of 3% to 3.5%, which neither stimulates nor restrains economic growth. The uncertainty surrounding the exact neutral rate adds complexity to the Fed's decision-making process. 

For the housing market, this approach implies that mortgage rates may remain elevated longer than previously anticipated. High borrowing costs have already contributed to a slowdown in home sales, with December experiencing the most significant seasonal deceleration in nearly two years. Homes spent an average of 70 days on the market, marking the slowest December in five years. 

As the Fed continues to monitor economic data and adjust its policies accordingly, both consumers and businesses should prepare for a period of sustained higher interest rates. This environment underscores the importance of strategic financial planning in the coming year.