Jan 9, 2025

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Fed Signals End to Rate-Cutting Cycle Amid Stubborn Inflation

The current outlook for interest rates has shifted significantly since September. Initially, the market anticipated aggressive rate cuts, projecting the federal funds rate to drop to 3% by 2025. Now, only one to two cuts are expected.

Key observations include:

• The effective federal funds rate (EFFR) and the two-year Treasury note are now at parity, indicating the market no longer anticipates further rate cuts or hikes.
• Inflation remains stubbornly high, leading the Federal Open Market Committee (FOMC) to revise projections, viewing inflation risks as weighted to the upside.
• A resilient labor market is contributing to a more hawkish stance on monetary policy.

Despite a prevailing sentiment against further cuts, some FOMC members, like Governor Waller, still support potential cuts in 2025, depending on inflation progress and labor market conditions.

Investors face decisions on whether to respond to this evolving sentiment or disregard it as noise.