Why 2025 Could Be A Very Boring Year For The Fed

Making a chart of the federal funds rate in 2025 might turn out to be the easiest job in finance.

As inflation stays stubbornly high and jobs hold steady, the financial markets are pricing in a good chance that the central bank will hold its key interest rate steady through all of 2025. As of Tuesday, traders were betting that there’s 18.3% chance the Federal Reserve will keep its key interest rate flat through next December, according to the CME Group’s FedWatch tool, which forecasts rate movements based on fed funds futures trading data. That compares to a 36.6% chance they’ll cut the fed funds rate one time by a quarter-point.

In a speech Monday, Federal Reserve governor Christopher Waller laid out central bankers’ dilemma. The central bank wants to reduce the fed funds rate, which influences borrowing costs on all kinds of loans, but the post-pandemic burst of inflation from late 2021 is still lingering. The question for Waller and other policymakers is whether inflation is on a trajectory down to their 2% annual goal or if it’s stuck in high gear.

Rate cuts are on the table if inflation starts to cool down in the coming months, but that’s far from certain. And in the meantime, the Fed is on “pause.”

“The data are not supporting a reduction in the policy rate at this time,” Waller said at an economic workshop in Australia. “But if 2025 plays out like 2024, rate cuts would be appropriate at some point this year.”

What Could Change the Fed’s Outlook?

There are two major complications to the inflation outlook.

First, economists have taken the January inflation data with a grain of salt because they are concerned that seasonal adjustment issues are making price pressures seem worse at the beginning of the year than they really are.

Second, President Donald Trump has proposed a range of policies that have yet to be implemented, including steep tariffs on imports that could drive up consumer prices. Fed officials are waiting to see what policies are finalized and what effect they have on the economy.

One reason to un-pause the rate cuts and chop borrowing costs would be if the job market starts to falter, signaling a severe rise in unemployment from its current low level. By law, the Fed is supposed to keep inflation low and employment high. However, the job market has held steady despite relatively steep borrowing costs for businesses and consumers.

The Fed keeping its key interest rate steady for an extended period of time would not be unprecedented. The Fed held the rate flat after chopping it to near zero after COVID-19 hit and didn’t raise it again until 2022. Before that, the Fed held interest rates near zero from 2008 through 2015 because of the Great Recession and its aftermath.

Fed officials must also grapple with where to set the Fed funds rate at a “neutral” level where it’s not boosting the economy with easy money but not so high that it’s dragging down the job market. As of December, Fed officials estimated the neutral rate is around 3%.