Several major financial institutions are now predicting that the U.S. Federal Reserve will implement at least two interest rate cuts in 2025. These revised forecasts follow the release of a weaker-than-expected August jobs report, which has led to increased speculation about a potential economic slowdown.

Driving Factors Behind the Forecasts

The primary catalyst for these revised forecasts is the recent U.S. jobs report, which revealed that only 22,000 jobs were added in August, significantly below the anticipated 75,000. This disappointing figure, coupled with an increase in the unemployment rate to 4.3% (the highest since October 2021), has fueled concerns about a weakening labor market. The trend of rising unemployment is likely to get the attention of the Federal Reserve, which has a dual mandate of low unemployment and stable prices.

Bank of America (BofA) economists, who previously held an outlier position by forecasting no rate cuts in 2025, have now shifted their stance. They project two 25 basis point (BPS) cuts, one in September and another in December. According to a report by Aditya Bhave, there is now clearer evidence of deterioration in labor demand, not just supply.

Other major financial institutions are also aligned with this view. Goldman Sachs economists are projecting three 25 BPS cuts in 2025, commencing in September and continuing through October and November. Similarly, Citigroup forecasts a total of 75 BPS cut in 2025, distributed in 25 BPS increments in September, October, and December.

Market Expectations and Potential Impact

The market is largely anticipating a rate cut in September. Data from the Chicago Mercantile Exchange (CME) Group indicates that over 88% of traders expect a 25 BPS rate cut at the next Federal Open Market Committee (FOMC) meeting in September, while about 12% expect a 50 BPS cut. Swap contracts that predict Fed decisions have fully priced in a September rate cut after the weak August employment data was released.

Lower interest rates generally inject liquidity into markets and are often seen as a positive catalyst for rising asset prices. Conversely, higher rates tend to have the opposite effect. A decrease in interest rates would reduce borrowing costs for consumers and businesses, potentially stimulating economic activity. Industries such as real estate and housing are expected to see renewed vigor as reduced mortgage rates stimulate demand for homeownership.

Factors that could prevent rate cuts

Despite growing expectations for rate cuts, some analysts urge caution. Morgan Stanley's Global Investment Committee acknowledges the political pressures on the Fed to ease monetary policy. They also recognize that there has been some labor market cooling that might support a proactive rate cut. Cleveland Fed President Beth Hammack stated that inflation remains too high to cut rates this month.

BMO Capital Markets suggest that persistent price pressures could prevent the Bank of Canada from cutting rates. Senior Economist Sal Guatieri noted that stubborn core inflation sets a high bar for another rate cut.

Looking Ahead

The likelihood and timing of interest rate cuts in 2025 will depend on incoming economic data, particularly regarding employment and inflation. The Federal Reserve will carefully assess these indicators to determine the appropriate course of action. While the recent jobs report has increased the probability of rate cuts, the Fed will likely want to see further evidence of economic weakness before making any policy changes.