2025 will open with a Fed more cautiouswhich will cause the markets to drag their necks, moving the first cut of 2025 at least until mid-yearafter the 25-point cut made in the last meeting of 2024. No cuts in January, therefore, nor in March and May (no meeting is planned for April). This is what they predict UBS analystsbased on the indications received from Powell’s latest press conference and the most recent macroeconomic data.
First cut of 2025 in June
Economists at UBS expect the Federal Reserve to make the pHuge interest rate cut of 25 basis points in Junefollowed by another in September. A maximum of two cuts are expected next year.
The Fed cut interest rates by 25 basis points at its latest FOMC meeting this month, in line with market expectations. This is the fourth cut since September, which brings the total reduction to 100 basis points and places the target range at 4.25%-4.5%.
However, the dot-plot presented a more hawkish picture: The median projection now reflects just 50 basis points of cuts for 2025 and suggests that rate adjustments could extend through 2027. The Fed Chair Jerome Powellin a press conference, he expressed optimism about the state of the economy and on the outlook for 2025 and acknowledged that economic growth has exceeded expectations and that inflation remains above the 2% target. Accordingly, the central bank intends to adopt a more measured approach towards further rate reductions.
What the market suggests
Expectations not too far off from this scenario I am confirmed by the market. At CME i FedWatch futures indicate for the meeting of January a stalemate almost certain, with a probability of 91.4%.
Expectations for students are more balanced meetings of Marco and Maywhen the expectations for a cut and a stalemate are approaching a lot: for the mark there is a 46.7% probability of a 25 point cut and 49.4% of unchanged rates; for May the probability of a 25 point cut rises to 467.2% against 39.7% which indicates stable rates.
However, the expectation of a 25-point cut prevailed in June to 4-4.254%, taken for granted at 45.3% against a 29.4% which indicates rates still stable at 4.25%-4.50% and a small 21.4% which hypothesizes a second cut up to 3 ,75%-4%.
Estimates to be taken with caution
While this more cautious approach is currently a given, a rate cut in March could become relevant again if it occurs bad news from the job market early next year or if there was a worsening of the international situation or an increase in geopolitical tensionssuch as to worsen the outlook for the US economy. Ultimately, the Fed’s approach remains meeting by meeting and anchored to the data.
The reflections on the dollar
The Fed’s aggressive stance has fueled a US dollar rallywith a dollar index that exceeded 108. This trend expected to persist into 2025as political factors, including the imminent inauguration of Donald Trump at the White House, they should maintain a strong dollar in the short term.
UBS, however, sees through limits to further dollar strengthciting overvaluation, expectations of further monetary easing, and the market’s focus on the positive aspects of Trump’s policies and, therefore, views the current dollar rally as a sales opportunityexpecting EUR/USD to return to 1.10 later in 2025.
