Its target rate is expected to remain unchanged at the policy meeting, marking a change in 2025 after three straight cuts. Keeping rates steady is the current outlook through June, but a number of factors are at play that could change the calculus in the coming weeks.
Let’s start with what appears likely: The fed funds futures market is pricing in a high probability that the central bank will keep its target rate steady in the 3.5%-to-3.75% range at tomorrow’s FOMC meeting.
Policy-sensitive approaches are associated with change. The difference between this widely followed yield and the current effective fed funds (EFF) rate is close to the narrowest spread in nearly a year. This is a sign that this segment of the Treasury market is no longer anticipating rate cuts, as it was in previous months, when the 2-year yield traded well below the EFF, falling below -80 basis points at one point last May.
As usual, the outlook gets cloudier than the next FOMC meeting we see, but a number of confounding factors make it exceptionally challenging.
There’s one reason to think the Fed will be hard pressed to cut rates anytime soon: U.S. economic activity has been resilient, suggesting that further easing of policy, if not inflation, is unnecessary.
Although some economists warned last year that the risk of a recession was rising, recent no-casts for the upcoming (and delayed) fourth-quarter report are pointing to continued strength. The Atlanta Fed’s model is now projecting that Q4 growth will accelerate to 5.4%, which (if correct) would mark the highest output in four years.
Analysts have warned that it is still difficult to produce relatively reliable Q4 newcasts due to the delayed impact of the government shutdown in October. But as we take a more cautious view of the Q4 nowcast, using median estimates from multiple sources, the final three months of 2025 point to a relatively strong, if still relatively strong, outlook for the economy.
On this basis, policy changes are still a matter of slowing, if not stopping, rate cuts.
Peter Hopper, vice chair of research at Deutsche Bank, agrees. “It’s time to sit down and take a look at things,” he told The New York Times. “We’ll get some more ease, but it’s not immediate at this point.”
The counterintuitive view is that, for all the concern about a shock to revenues, rates remain relatively stable, which in turn leaves room for more rate cuts, if only as insurance to keep the economy humming. Last week’s belated update to November—the Fed’s preferred measure of inflation—put the headline and core reading at a year-over-year pace of 2.8 percent. That’s up from 2.7 percent in October, and slightly ahead of the Fed’s 2 percent target.
An analysis of the Richmond Fed’s latest monthly PCE numbers in the context of the historical record shows that “inflation is behaving much as it did before the pandemic, in line with — or slightly below — the Fed’s 2 percent target.”
Meanwhile, the jury is still out on whether recent updates continue to slow uptake. Some economists argue that a marked decline in payroll growth leads to a further decline in the rate of decline. The pushback is that soft hiring has yet to translate into increased layoffs, as indicated by low levels in recent months.
Adding to the Fed’s challenge of setting rates in a complex macro environment is ongoing political pressure from the White House to further ease policy. President Trump last week renewed his criticism of Fed Chair Jerome Powell, telling CNBC that inflation has been “beaten.”
Perhaps the Fed’s biggest challenge is convincing markets that whatever the central bank decides in the coming months, it is setting rates based on an independent analysis of the economy. That is becoming more difficult amid the ongoing criminal investigation of Fed Governor Lisa Cook, which some observers say is a subtle effort by the White House to sway the central bank’s decisions in favor of higher rate cuts by opening a new seat at the Fed.
More on the outlook: Powell’s term as Fed chair expires in May, and it’s unclear how the new Fed chair will influence policy.
However, so far, the treasury market appears relatively calm, and so it can be argued that the crowd is not particularly worried. The benchmark, though it has recently risen to highs since August a few days ago, is still trading in a middling range versus recent history.
A rise in this key yield above its recent trading range could change the calculus, perhaps dramatically. Moreover, at a time of growing concern about public debt worldwide.
This week’s rise above $5,000 an ounce highlights growing concerns about the so-called debasement.
“We are at the beginning of a global debt crisis, with markets increasingly fearful governments will try to address out-of-control debt,” wrote Robin Brooks, a senior fellow at the Brookings Institution and former chief economist at the Institute of International Finance.
For now, at least, there is still a hint of trouble in the form of steadily rising yields in the Treasury market. When and if that changes, the risk calculus will change. The challenge of the moment is deciding whether this is the calm before the storm, or another round of noise driven by more and more warnings.