Fed Rate Hike Outlook 2025: Inflation and Jobs Market in Focus

Amid widespread anticipation of a potential first interest rate cut by the Federal Reserve in 2025, investors are questioning how many cuts may ultimately occur. While prevailing expectations suggest a possible cut this week, the larger question is how far the Fed will lower rates in the face of a cooling jobs market, persistent inflation, and growing pressure from the White House.

Decoding the Fed's Dot Plot

Clues may lie in the Fed's "dot plot," a quarterly-updated chart displaying each official's forecast for future benchmark interest rates. The previous dot plot, released in June, showed that Fed officials generally foresaw two rate cuts this year, amid uncertainty surrounding how the Trump administration's tariff, immigration, and tax policies would impact the economy. Most Fed watchers predict the central bank will cut rates by 25 basis points this week.

Balancing Act: Inflation vs. Jobs

Will policymakers stick to their prior forecasts, or will they become more dovish? The Fed is scheduled to hold two more policy meetings this year, in late October and early December. The Fed's keeping its benchmark rate in a 4.25%-4.5% range for much of 2025 has tested President Trump's patience, who is seeking to insert White House economic advisor Miran An in the Fed while ousting current Fed governor Cook. Trump has consistently attacked Powell for not cutting rates sooner and has repeatedly called him "Mr. Late." Former Cleveland Fed President Mester stated that she's "not convinced" that one or more rate cuts would alleviate political pressure on the Fed. "The president has made it clear he wants to get his people onto the Board and he wants to lower interest rates fairly aggressively," she said. "He doesn't seem to care as much about the independence of monetary policy and whether it's shielded from short-term political factors." But she doesn't anticipate the Fed's rate cut this week exceeding 25 basis points, as policymakers weigh their dual responsibility of maintaining price stability and maximizing employment. Mester said a small rate cut would "lessen the restrictiveness of policy, but it would still be restrictive and put downward pressure on the inflation part of the dual mandate while providing some insurance for the labor side."

Data to Dictate the Fed's Path

Mester also doesn't foresee a series of rate cuts following this week's easing. "They're going to have to pay close attention to the data and make decisions on a meeting-by-meeting basis," Mester said. "They're going to try to be careful and make sure they maintain balance. If they're going to get inflation down, they're going to need to keep policy somewhat restrictive. If labor market conditions deteriorate substantially, then they might pivot to easing. But we're not there yet." However, Wall Street traders are betting the Fed will continue to cut rates at the October and December meetings before pausing until April of next year. Some have even more aggressive predictions. Economists at Morgan Stanley said last week that they expect the Fed to make cuts at every meeting until next January, when the target range will fall to 3.5%. Wilmington Trust chief economist Luke Tilley anticipates the Fed will remain "noncommittal" on future rate cuts this week as the Fed tries to balance weak job growth and inflation. But he does forecast the Fed will cut rates at each of the next three policy meetings because of weakness in the labor market. In fact, Tilley said he expects the Fed to cut rates six times, three times by the end of this year and three times at the start of next year, which would bring the Fed's policy interest rate to a range of 2.75% to 3% as it searches for a so-called neutral level designed to neither stimulate nor impede growth. Tilley said, "If the Fed is thinking about inflation in a year, there's not a lot of inflation if you have unemployment." He anticipates weak labor market data will be accompanied by possible negative GDP, "We expect the U.S. economy to be fairly weak, with a 50% chance of recession and a 50% chance of deteriorating unemployment." Former Kansas City Fed President George believes the real question is how the Fed assesses the restrictiveness of its policy and what its ultimate goal is. Will Fed policymakers begin to re-establish a bias toward cutting rates and see it through to the end? Or will they be more cautious and signal that any future moves will depend on inflation data? The latest inflation data leads George to believe that inflation is stuck at around 3%, noting that even if tariffs haven't produced the price pressure outbreak many anticipated, the underlying momentum is cause for concern. Inflation, as measured by the CPI, showed that core CPI, which excludes volatile food and energy prices, rose 3.1% year-over-year in August, unchanged from July. At the same time, she said labor market data suggests the labor market may be weaker than believed. The labor market only added 22,000 jobs in August, weaker than economists' expectations of 75,000, and the unemployment rate rose from 4.2% to 4.3%. George said, "My suspicion is, if you look around the meeting table, there will be those more inclined toward the labor market mandate than the inflation mandate."