The market generally expects the Federal Reserve to cut interest rates again at its December meeting. The question is what it will do next year.

Recent sticky inflation data and evidence of steady growth in the US economy have raised doubts about whether the Federal Reserve will cut interest rates as quickly as previously indicated. In September, the Fed's Summary of Economic Projections (SEP) projected four rate cuts next year.

According to Bloomberg data, the market currently expects the Federal Reserve to cut interest rates about twice in 2025. The Fed will release updated forecasts on December 18.

Although policymakers have differences in specific details, Wall Street economists generally believe that the current rapid pace of Federal Reserve rate cuts will not continue.

Sarah House, Chief Economist at Wells Fargo & Co, said at a media roundtable on November 21, "As we enter 2025, we may see a slowdown in the pace of future rate cuts, with the Fed possibly cutting rates once every other meeting." Her team expects the Fed to cut rates three times in 2025.

There is little dispute that the federal funds rate, currently in the range of 4.5%-4.75%, is almost restrictive. This has led many economists to believe that as the Fed continues to aim for a "soft landing," where inflation falls to the 2% target without a significant economic slowdown, further easing measures may be on the horizon.

With the steady growth of the economy in the USA, concerns about a slowdown in the labor market have been temporarily set aside. The central point of current market debate is how much the Federal Reserve will cut interest rates next year in the absence of significant improvement in inflation data.

Matthew Luzzetti, Chief US Economist at Deutsche Bank, expects the Federal Reserve to cut interest rates again in December, then pause rate adjustments for the entire year of 2025, waiting for more progress on inflation.

"The urgency to cut rates is much smaller," Luzzetti told Yahoo Finance. "It might make sense to slow down rate cuts earlier than they expected."

The process of anti-inflation has stalled.

Federal Reserve board member Bowman stated in a recent speech that the progress towards the Fed's 2% inflation target has "stalled" over the past few months, and she called for the Fed to cut interest rates "cautiously."

The latest reading of the Federal Reserve's preferred inflation indicator shows that in October, price increases remained unchanged from the previous month. Core PCE in October rose by 2.8% from the same period last year, well above the Federal Reserve's target.

Two other tricky inflation data points have intensified the debate on the magnitude of the Federal Reserve's interest rate cuts in 2025.

Haus says that if the anti-inflation process slows down, "it will increasingly be difficult to justify further interest rate cuts."

Federal Reserve officials discussed similar outcomes at the November meeting.

"Some participants noted that if inflation remains persistently high, the Committee may pause the easing of policy rates and keep them at restrictive levels," the minutes of the Federal Reserve's meeting said.

Economists at morgan stanley and jpmorgan hold views on the Fed's rate cut path similar to wells fargo & co, namely that by the end of 2025 the federal funds rate will remain in the range of 3.5%-3.75%.

"Given the slowdown in the anti-inflation process and the diminishing employment risks, we believe this means that the Fed will slow down the pace of rate cuts to once per quarter, indefinitely pausing rate cuts after reaching the 3.5%-3.75% target range at the FOMC meeting in September next year," wrote Michael Feroli, chief U.S. economist at jpmorgan, in his 2025 economic outlook.

Similar expectations are also held by Seth Carpenter, chief global economist at morgan stanley. He believes the Fed will cut rates to 3.5%-3.75% before May next year, then pause rate cuts until 2026 amidst "inflation and overall policy uncertainty."

Greg Daco, chief economist at EY, told Yahoo Finance that part of the reason the Fed is pausing rate cuts is to ensure it does not cut rates to a "stimulative" level. Given the current belief in the solid foundation of the U.S. economy, excessive rate cuts could reignite concerns about the hot U.S. economy leading to persistent inflation.

Daco said: "They want to avoid a situation where monetary policy is suddenly expansionary, due to too rapid easing, and interest rates fall below a neutral level." A neutral rate refers to a level of interest rates seen as neither restraining nor supporting economic activity.

New challenges.

Many economists, like Cappante, are concerned about the "policy uncertainty" of the Trump administration in 2025 after taking office.

Deutsche Bank's Luzet told Yahoo Finance that this uncertainty is different from the economic reopening changes after the COVID-19 pandemic, which altered every economic data point, thus challenging the overall economic outlook. This time, the vague prospects are closely related to the policy details and implementation timing of elected President Trump.

Although the disparity between what Trump said before gaining control of the White House and the actual policy implementation is yet to be observed, there is consensus that his various versions of tariff policies will exacerbate inflation. This may pose a challenge for the Fed as it is already battling stubborn price increases.

After considering various policies, Deutsche Bank expects the US economy's annualized growth rate in 2025 to reach 2.5%, the year-end unemployment rate to be 3.9% (lower than the current 4.1%), and the Fed's preferred inflation indicator - core PCE to be 2.6% by the end of 2025.

"From the Fed's perspective, stronger economic growth, a stronger labor market, higher inflation... Therefore, all these factors put together will inevitably have a hawkish effect on the Fed's outlook," Luzet said.

Editor/Jeffy