Later and Fewer

Recent developments showing elevated US inflation, robust payrolls, and easing financial conditions have strengthened the case for the Federal Reserve to hold policy steady. The door is closing on an interest rate cut as early as June, barring a sharp turnaround in the inflation data.

We now expect two 25bps rate cuts this year, in July and December. This is a delayed start and a shallower path to the Fed’s easing compared to our earlier forecast of a June start and 125bps of easing, a view we had held throughout volatile markets pricing in the past six months.

The timing of the first cut hinges critically on the inflationary trajectory and it is a close call between July and September. We continue to expect a measured pace of rate reductions in 2025 and a terminal rate for this cutting cycle above the Fed’s median neutral rate estimate of 2.6%.