The big question about interest rates for 2025 is this: Will the Federal Reserve cut interest rates during the year?
Maybe not as much as many on Wall Street think. If you believe the CME Group's FedWatch tool, there may be at least three rate cuts in 2025, along with a cut at the Fed's meeting on Dec. 18.
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If you were listening to Fed Chairman Jerome Powell on Wednesday, you would not be wrong to think that might be an aggressive policy.
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Speaking at The New York Times DealBook Summit, Powell noted, as he has for some time, that the U.S. economy is "remarkably strong" and the envy of the world.
The point of the Fed's September rate cut, its first since 2020, was not just to acknowledge that inflation was easing, he said. It also was to signal to the financial markets around the world that the Fed stood ready to step in to help U.S. labor markets if layoffs suddenly shot higher.
But that did not mean the Fed would cut rates willy-nilly over the next year.
In fact, Powell said, the economy is stronger than the Fed expected, and the Fed can "afford to be more cautious as it lowers rates."
In other words, rates may not come down as quickly as many might like, including President-elect Donald Trump who is an avowed fan of low rates. On the other hand, there are concerns that Trump's proposals to boost tariffs and deport millions of non-legal immigrants would be inflationary.
So, those who think through the question see three rate cuts:
- One in December
- Two more in 2025
How the Fed stays in control of the economy
The Fed controls rates via the New York Federal Reserve Bank's trading desk, which buys and sells Treasury securities to achieve the Fed's rate goals. That activity affects the yields on short-term interest rates, especially the rates on cash that banks lend each other overnight to meet reserve requirements.
The rate, known as the Federal Funds rate, is now at 4.5% to 4.75%. Between July 2023 and September, it was as high as 5.25% to 5.5% as the Fed worked to bring down post-pandemic inflation.
The rate is the foundation on which all U.S. short-term rates are derived. And, directionally, the fed-funds rate signals where Fed generally wants rates to go.
Which is lower but maybe not too low. That has cheered Wall Street. The Standard & Poor's 500 Index, the Dow Jones Industrial Average and the Nasdaq Composite Index closed at record levels on Wednesday. The yield on the 10-year Treasury note fell to 4.181% from Tuesday's 4.23%.
Home buyers may face Fed interest rate challenges
But buyers and sellers of homes might not be so ecstatic
Rates on 30-year mortgages are around 6.8%. That's a lot better than in October 2023 when the 30-year mortgage rate was 8%. On a $250,000 mortgage, that meant a monthly principal and interest payment of some $1,834.
The rate fell to 6.1% in September, then rose to as high as 7.1% on Nov. 6 before falling back again to 6.8%. The 6.1% rate in September produced a payment of $1,515. At 6.8%, the payment is $1,630.
Powell vows to defend Fed independence
Donald Trump chafed in his first term that he couldn't take control of the Fed.
He hinted at it during the Presidential campaign.
Powell was asked at a November news conference if he intended to resign as chairman. His one-word reply was "No."
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At the DealBook summit, Powell defended the Fed's independence from the White House and even the Treasury on Wednesday.
He said he believes only Congress can remove him because Congress created the modern Fed. An independent Fed keeps politics out of economic decisions, he has argued. And Fed leaders, from Paul Volcker to present, have fiercely defended the Fed's status.
Powell's term as chairman — his second — ends in May 2026. He could be replaced as chairman then, but he has two more years left on his term as a Fed governor. Powell has hinted he would quit after eight years as chairman.
Typically, a Fed chairman leaves when a President has nominated someone else to the job.
Only one Fed chairman refused to just go: Marriner Eccles, one of the most important Fed chairs, was chair from 1936 to 1948 when President Harry Truman replaced him with Thomas McCabe. Eccles, however, remained on the board until 1951. The Fed's Washington, D.C., headquarters is named for Eccles.
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