WASHINGTON, DC – SEPTEMBER 18: Federal Reserve Chairman Jerome Powell speaks during a news … More
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Fixed income markets still project a handful of interest rate cuts from the Federal Open Market Committee in 2025, according to the CME FedWatch Tool. Those expectations have been relatively steady despite recent market volatility. Even though short-term rate expectations have not changed much, rates on longer-term bonds have increased and the FOMC may alter its plan for rates as data comes in. Policymakers’ forecasts for the U.S. economy in 2025 already are evolving.
John Williams’ Policy Speech
FOMC officials and other economists now expect that slower growth and higher inflation are likely, due in, part to tariffs and immigration policy. For example, New York Federal Reserve Chair John Williams said at a speech on April 11, “Given the combination of the slowdown in labor force growth due to reduced immigration and the combined effects of uncertainty and tariffs, I now expect real GDP growth will slow considerably from last year’s pace, likely to somewhat below 1 percent. With this downshift in the pace of growth, I expect the unemployment rate to rise from its current level of 4.2 percent to between 4-1/2 and 5 percent over the next year. I expect increased tariffs to boost inflation this year to somewhere between 3-1/2 and 4 percent.” Williams went on to say regarding monetary policy, “Elevated uncertainty poses many questions about the future of the economy and the path of monetary policy. It is simply too early to know the answers.”
Recession Chances Are Elevated
It is also noteworthy that although Williams does not forecast a recession in 2025, prediction markets view it as a real possibility. For example, Polymarket currently gives a 50% chance of this scenario, though that’s down from higher probabilities in early April.
Rising Longer-Term Interest Rates
In addition, interest rates on longer-term U.S. government borrowing have risen relatively sharply over a short-term period. For example, the yield on the Treasury 10-year government bond dipped under 4% in late March but has since risen to over 4.5% in volatile markets. Such a sharp rise in government bond yields over a period of weeks is relatively unusual. It’s especially unusual at a time when the stock market is generally declining. The root cause of these moves is not immediately clear and elevated yields may not persist as volatility continues. However, the U.S. dollar has also generally weakened in 2025 so far, too, and a significant portion of U.S. debt is held by non-U.S. investors.
Interest Rate Expectations For 2025
Expectations are that the FOMC’s next scheduled decision on May 7 will most likely see no change in rates. However, a cut is seen as more likely than not at the subsequent FOMC decision on June 18. Beyond that, the range of outcomes is broader, with perhaps further cuts in September and October as the most likely path, resulting in three cuts for the year.
Nonetheless, fixed income market projections imply that anything between one and five cuts for 2025 is a realistic scenario. Hence, short-term rates could end the year between 3% and 4.25% as compared to 4.25% to 4.5% currently. Fixed income markets believe short-term rates are moving lower, but are unclear by how much. FOMC officials are waiting for incoming economic data before committing.
