Research firm BCA expects the Federal Reserve to cut interest rates by more than 50 basis points in 2025, which contradicts expectations prevailing in the Federal Open Market Committee (FOMC). These forecasts rely on the assumption that inflation in the United States will remain below the targets set by the Federal Reserve, while unemployment rates will rise above current expectations. In its latest report, the BCA indicated that the Fed will make a decision to cut interest rates beyond 50 basis points, which will reduce the target range for the funds rate from 4.25%-4.50% to 3.75%-4.00%.
Analysts at the BCA expect core personal consumption expenditure inflation, one of the Fed’s main indicators, to reach around 2.5% by early 2025. If current trends continue, this could mean that inflation will be lower than the Fed’s previous forecast, enhancing the possibility of a deeper-than-expected rate cut. Although the Fed sees a 50 basis point cut as sufficient in 2025, analysts believe BCA said it would be more easing, given their expectation that inflation will continue to decline while labor market growth slows.
On the other hand, the labor market in the United States witnessed significant weakness, with the unemployment rate rising to 4.2% from its lowest level in the economic cycle at 3.4%. The Bank of Canada sees this weakness in the labor market as having a direct impact on the Federal Reserve, especially as fears of slowing economic growth grow. The unemployment rate is expected to hit 4.3% by the end of the year, which could help correct the Fed’s expectations for economic activity in the country.
Factors that may push the Fed to cut interest rates
Many factors may push the US Federal Reserve to decide to cut interest rates, and several economic and market aspects may affect these decisions. Most notably, low inflation or a marked decline in price levels. When inflation shows a significant decline or does not meet the Fed’s target, the central bank may be forced to cut interest rates to stimulate economic activity. For example, if inflation reaches below-target levels, the Fed may cut interest rates to support consumer spending and increase demand for goods and services, which helps drive economic growth.
Another factor that could push the Fed to cut interest rates is a weak labor market. If the unemployment rate rises significantly or the economy fails to create new jobs, the Fed may consider that a cut in interest rates will be necessary to stimulate the economy. Lowering interest rates can contribute to reducing borrowing costs for consumers and businesses, encouraging spending and investment, thereby creating new jobs and relieving pressure on the labor market.
Moreover, declining economic growth could be a major reason behind the Fed’s decision to cut interest rates. If the US economy experiences a slowdown in growth rates, whether as a result of contraction in domestic demand or from external influences such as global financial crises or the trade war, the Fed may feel the need to take action to lift economic activity. Lower economic growth directly affects companies’ ability to make profits, reducing their investments and employment. In this case, the reduction of interest is a strategic step to support growth by stimulating investment and consumer activity.
The impact of the rate cut on the US economy in 2025
The reduction of interest rates by the US Federal Reserve will have significant effects on the US economy in 2025.
When the Fed cuts interest rates, borrowing becomes less expensive, incentivizing individuals and businesses to borrow and spend. Individuals will feel that the costs of personal loans, including home loans and credit cards, have decreased, which could lead to an increase in consumer spending. This, in turn, will stimulate demand for goods and services in the market, contributing to economic growth.
In addition, lowering interest rates will encourage companies to increase their investments in new projects. Companies that were reluctant to make investment decisions due to the high cost of borrowing will now be more likely to take advantage of the low interest to finance their projects, increasing productivity and economic expansion. Lower financing costs can also encourage companies to increase their operations and hire more workers, helping to reduce the unemployment rate.
On the other hand, the cut in interest rates boosts the stock market, as it reduces yields on bonds and investors turn to stocks in search of higher yields. These moves could lead to higher stock prices, reviving the personal wealth of investors and households. However, these effects vary depending on the size of the cut and the extent of the market response, as weak domestic demand or global challenges may curtail profits in some sectors. Rate cuts may also have the effect of reducing public debt pressures.
