Interest Rate Update: 2024 Review & 2025 Outlook
January 8, 2025
At the start of 2024, Federal Funds Rates (Fed Rates) had plateaued at a range of 5.25%-5.5%, with the Fed having paused rate hikes six months earlier1. Despite rates having held steady, the year opened with considerable optimism that rate cuts were imminent, with the Fed projecting between three and four rate cuts in 20242 and many analysts expecting rates at or below 4% by the end of the year3. This was based on several factors, with the most notable being several consecutive months of better-than-expected inflation data, strong jobs and economic data reports for the US, and a swift change in tone from Fed Chair Jerome Powell, who began to acknowledge that rate cuts might be on the immediate horizon as the calendar flipped to 20244.
That sense of optimism was short-lived as inflation posted several worse-than-expected months to open 2024 while both jobs and the US Economy showed no signs of weakening. By mid-year, both the Fed and most analysts began to pull back on rate cut predictions, ultimately projecting Fed Rates would remain in the mid-to-high 4% range at the end of the year5.
While Powell spent much of 2024 delivering a consistent message, this uncertainty inspired dramatic fluctuations in forward rate projections throughout the year, as both market analysts and the Fed’s governors struggled to interpret and plan around constantly changing data. Powell’s “wait and see” strategy preached a data-driven approach in the hopes of guiding the US Economy to a soft landing—getting inflation under control while avoiding a recession. Throughout last year, Powell consistently reinforced the Fed’s goal of reducing inflation to a 2% rate over the long run and maintaining maximum employment, that they would carefully assess all available data in their decision-making process, and that they remained “attentive to the risks of both sides of its dual mandate”6.
By the end of Q3, two key developments began to unfold. First, the Fed lowered Fed Rates by 50bps in September, noting inflation’s substantial easing from a 7% peak to 2.2% and their confidence that “the risks to achieving [their] employment and inflation goals as roughly in balance” as of that meeting.7 Second, there was a noticeable lack of consensus amongst the Fed members, highlighted both by an increasing gap between voting member’s Dot Plot projections and the first dissenting vote from a Fed governor in more than two years, with governor Michelle Bowman voting against the 50bp rate cut in September.8
This disagreement regarding proper monetary policy continued through the end of 2024, with Governor Beth Hammack voting against December’s 25bp rate cut9 and three additional non-voting members indicating they didn’t believe the rate cut was appropriate10. Chart 1 below shows December’s Dot Plot (gray dots), along with the Dot Plot median (blue dots) and current SOFR forward projections from Chatham Financial (blue line). While the dissent regarding last month’s rate cut was minimal, the spread between the Dot Plot votes in 2026 and beyond is substantially larger, highlighting the challenge the Fed is facing over the next few years. To further complicate matters, the Fed’s preferred inflation measure increased in November, following several months of inflation trending downward11.
This data fluctuates daily and what is depicted above is as of 1/2/2025.
While there is considerable uncertainty around what comes next with interest rates as the calendar flips to 2025, it’s worth noting that the same was true one year ago. Despite the unprecedented speed of rate hikes in 2022 and 2023, a contentious election year, and fluctuating inflation data, Fed Rates ended the year within 15bps of the Fed’s projections from a year prior1. While rate projections from analysts changed dramatically throughout the year, the Fed’s Dot Plot didn’t experience such extreme swings quarter-to-quarter8.
Following the Fed’s December 2024 meeting, Powell both acknowledged the disagreements within the committee and signaled a return to their “wait and see” approach on future cuts, stating “today was a closer call but we decided it was the right call,” and that by having lowered interest rates by 100bps over their last three meetings, the Fed can “be more cautious as [they] consider further adjustments to [their] policy rate”12.
With the onset of the new year, we’ve updated our borrowing rate assumptions to reflect the current outlook. Chart 2 below compares our current Secure Overnight Financing Rate (SOFR) projections to our November 8th projections. These rates are based on the most-current Fed Dot Plot and the SOFR Forward Curves on each date shown. Current rates decreased in response to the December rate cut while long-term rates began to climb in response to the updated Fed projections.
Y1-7 Average Difference: 0.13% | Y1-10 Average Difference: 0.13%
While the Fed is far from having a consensus on where long-term rates are going, we see two key defining issues on the topic of where rates will go in 2025: what the “neutral” Fed Rates are in today’s economic environment and the impact of policy changes by President-elect Trump.
There is a growing sentiment that the “Neutral” Fed Funds Rate is somewhere around 3%, rather than the 2% range it was prior to the onset of COVID13. Just one year ago, all but three of the FOMC voters had the “Long Run” rates between 2.25% and 3%. Now, more than half (11/19) have rates at/above 3%. This is a fairly substantial shift, especially after a year that saw 100bps of rate cuts10. This hesitation to cut rates too fast is reflected both in Chart 1 and Chart 3 below, which depicts CME Group’s rate probability tool. Currently, CME is projecting just two rate cuts in 2025.
This data fluctuates daily, and what is depicted above is as of 1/2/2025.
Additionally, the new projections are likely also being impacted by anticipated policy changes in 2025, most notably Present-elect Trump’s proposed broad tariffs and deportation promises, which are anticipated to raise domestic prices and increase wage pressures. While Powell has repeatedly stated he doesn’t wish to speculate on what changes might happen with the new administration and what the impact of those changes might be, he admitted that these proposed policies did weigh in on several voting members and what they believed proper monetary policy is, both right now and in their forward projections14.
As the first quarter of 2025 continues to unfold, we will closely monitor several leading factors regarding the outlook of interest rates and continue to provide updates on relevant developments. Ultimately, we believe the Fed is likely to hold rates steady and monitor both inflation and the US Economy during the first 100 days of the Trump presidency. This is in line with the “wait and see” approach preached by Powell throughout much of 2023 and 2024 and allows them to observe and respond to policy decisions once they are made, rather than speculating on what decisions might occur. With that said, a dramatic change in either inflation or the jobs report could force them to change rates sooner.
Similar to our mid-year update, we anticipate one of three scenarios playing out and forcing the Fed’s hand on interest rates. But until that time, investors should be prepared for rates to remain where they are for the next several months.
- The economy shows substantial signs of slowing, forcing The Fed to cut rates to avoid crushing the economy under the pressure of higher rates.
- Inflation resumes its downward trend, allowing The Fed to resume cutting rates proactively to avoid undue economic stress.
- November’s inflation uptick continues throughout early 2025, eventually forcing The Fed to renew rate hikes.
It’s also possible that inflation continues to stagnate at the current rate for an extended period of time and the economy shows no signs of slowing. While the consensus last summer was that this could eventually force the Fed to raise rates again, that may not be the case now. Given the increased belief that the “neutral” Fed Funds rate is higher than it has historically been, there is a really possibility that rates remain higher for longer in the absence of downward pressures on the US economy and jobs.
Schechter constantly monitors interest rates and updates our rate projections for our Premium Finance designs a minimum of once per month and following every Fed meeting. We will update additionally as needed based on the markets and various influencing factors. If you have any questions or would like to discuss interest rates or any other ongoing economic developments, please reach out to our team to schedule a call.
Sources:
[1]https://fred.stlouisfed.org/series/FEDFUNDS
[2]https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20231213.pdf
[4]https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20240131.pdf
[6]https://www.federalreserve.gov/monetarypolicy/files/monetary20240918a1.pdf
[7]https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20240918.pdf
[8] Current and historic Fed Economic Projection summaries can be found at https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm
[9]https://www.federalreserve.gov/monetarypolicy/files/monetary20241218a1.pdf
[10]https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20241218.pdf
[12]https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20241218.pdf