How many rate cuts does the market expect this year?

As of March 18, 2025, financial markets are closely monitoring the Federal Reserve’s monetary policy decisions, particularly regarding potential interest rate cuts. The CME FedWatch tool, which aggregates investor expectations, indicates a 99% probability that the Federal Open Market Committee (FOMC) will maintain the federal funds rate at its current range of 4.25% to 4.5% during its March meeting.

Looking ahead, market projections suggest a 78% chance that the Fed will keep rates unchanged in May, with the first 25-basis-point rate cut anticipated in June. A second cut of the same magnitude is expected in September. By the end of 2025, the probabilities are as follows:

• 32.2% chance of two 25-basis-point cuts, bringing the rate to a range of 3.75% to 4%
• 28.9% chance of three cuts, lowering the rate to 3.5% to 3.75%
• 17.8% chance of a single cut, adjusting the rate to 4% to 4.25%

Analysts and economists offer varied perspectives on the Fed’s rate-cutting trajectory. Comerica Bank’s chief economist, Bill Adams, anticipates a single quarter-percentage-point cut in 2025, likely in July, based on current policy enactments. Conversely, Goldman Sachs economists, led by Jan Hatzius, maintain their forecast of two cuts this year and an additional one in 2026, targeting a terminal rate of 3.5% to 3.75%.

Several factors influence these expectations:

• Inflation Trends: Despite previous rate cuts totaling 1 percentage point, inflation remains above the Fed’s 2% target, with core personal consumption expenditure (PCE) inflation at 2.8%. This persistent inflation may limit the Fed’s flexibility in adjusting rates.
• Trade Policies: The Trump administration’s aggressive tariffs have introduced uncertainties, potentially slowing economic growth and increasing inflation. The Organization for Economic Co-operation and Development (OECD) projects that these tariffs could reduce U.S. growth to 2.2% in 2025 and 1.6% in 2026, further complicating the Fed’s policy decisions.
• Economic Indicators: The labor market remains robust, with healthy job growth and low unemployment. However, the housing market faces challenges due to high mortgage rates and prices, affecting affordability and consumer sentiment.

In summary, while the market currently anticipates two to three rate cuts by the Federal Reserve in 2025, these projections are subject to change based on evolving economic data, inflation trends, and geopolitical developments. Investors and policymakers alike remain vigilant, adapting to new information as the year progresses.