Investing.com - The Federal Reserve is likely to cut interest rates three times in 2025 as inflationary pressures subside and the US employment picture remains balanced, according to analysts at Wolfe Research.
A raft of economic figures earlier this week pointed to an unexpected increase in job openings and sticky inflation. The readings, which came ahead of the all-important monthly US employment report later this week, bolstered bets that the Federal Reserve will carefully approach any possible interest rate reductions in 2025.
However, the data, which showed that the key openings-to-unemployed ratio remained flat at around 1.1 roles per jobless person in November, pointed to a once-hot US labor market "coming back into better balance," the Wolfe Research analysts said in a note to clients on Wednesday. As a result, although they expect that near-term strength in the job demand is likely to keep expectations for the amount of Fed borrowing costs cuts this year at between one to two, they still argue the central bank will opt for a third drawdown by December.
Investors are now anticipating the Fed will slash borrowing costs by 37.5 basis points by the end of the year, with the first drawdown not fully priced in until July, Reuters reported.
Recently, Fed officials have been signaling caution around further rate cuts following a decision to slash borrowing costs by a quarter of a percentage point at their December meeting. On Wednesday, minutes from the gathering could provide more clues into how policymakers will approach more decreases, particularly as the incoming Trump administration's sweeping tariff plans clouds the broader economic outlook.
Indeed, uncertainty around Trump's proposals for trade and taxes has led some officials to consider future rate cuts as if they were "driving on a foggy night or walking into a dark room full of furniture", Fed Chair Jerome Powell said in December.
Following last month's meeting, projections showed that Fed officials are now anticipating only 50 basis points in rate cuts this year. In September, estimates were for a full percentage point in reductions.
(Reuters contributed reporting.)