Question #6 for 2025: What will the Fed Funds rate be in December 2025? - InvestingChannel

January 1, 2025

Question #6 for 2025: What will the Fed Funds rate be in December 2025?

by Calculated Risk0106
Earlier I posted some questions on my blog for next year: Ten Economic Questions for 2025. Some of these questions concern real estate (inventory, house prices, housing starts, new home sales), and I posted thoughts on those in the newsletter (others like GDP and employment will be on this blog).

I’m adding some thoughts and predictions for each question.

Here is a review of the Ten Economic Questions for 2024.

6) Monetary Policy: The FOMC cut the federal funds rate four times in 2024 from “5-1/4 to 5-1/2 percent” at the beginning of 2024, to “4-1/4 to 4-1/2” at the end of the year. Most FOMC participants expect around two 25 bp rate cuts in 2025. What will the Fed Funds rate be in December 2025?

As of December, looking at the “dot plot”, the FOMC participants see the following number of rate cuts in 2025:

25 bp Rate Cuts  FOMC
Members
2025
No Change 1
One Rate Cut 3
Two Rate Cuts 10
Three Rate Cuts 3
Four Rate Cuts 1
More than Four 1



The main view of the FOMC is for two rate cuts in 2025.

Goldman Sachs economists still think there will be 3 rate cuts in 2025:

“The bond market took the meeting as hawkish and is now pricing just 32bp of cuts in 2025, down from 50bp yesterday, and broader financial conditions tightened substantially. We left our more dovish forecast of three more cuts in March, June, and September 2025 unchanged, though we acknowledge that better inflation news or worse employment news will be needed for a March cut.”

A key question: Is current policy restrictive (as Fed Chair Powell has said)?  With core PCE inflation at 2.8% year-over-year in November and the “neutral rate” at 2%+ would suggest a Fed Funds Rate at around 4.75% to 5.0% (Of course, estimates of the neutral rate vary widely).  
Currently the target Fed Funds rate range is ‘4-1/4 to 4-1/2’ percent.  And the FOMC projections show core PCE inflation only declining to 2.5% to 2.7% by the end of 2025 (Q4-over-Q4).
However, the FOMC believes inflation will come down, partially because of an expected decline in housing inflation.   Asking rents have been flat for almost two years, and measures of rent (housing / shelter) are slowly declining.
If we look at recent readings over the last 6 months annualized (through November):
PCE Price Index: 2.1% 
Core PCE Prices: 2.5%
Core minus Housing: 2.3%
Also, in Q1 2024, PCE inflation was very high.  There might be some residual seasonality in Q1, however, it seems likely inflation will be lower in Q1 2025, lowering the YoY measures.
The next FOMC meeting ends on January 29th, and the FOMC will likely hold rates steady at that meeting.   The FOMC might cut rates in March if inflation readings for January are favorable.
With inflation still above target over the last 6 months, my guess is there will be 1 or 2 rate cuts in 2025.
I also expect the FOMC to slow balance sheet runoff in 2025. 
FOMC policy will depend on what happens with inflation and employment in 2025.  

Here are the Ten Economic Questions for 2025 and a few predictions:

• Question #6 for 2025: What will the Fed Funds rate be in December 2025?

• Question #7 for 2025: How much will wages increase in 2025?

• Question #8 for 2025: How much will Residential investment change in 2025? How about housing starts and new home sales in 2025?

• Question #9 for 2025: What will happen with house prices in 2025?

• Question #10 for 2025: Will inventory increase further in 2025?

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