Fed Sees 2 Rate Cuts in 2025, Projects Higher Inflation and Lower Economic Growth

The Federal Reserve has signaled a cautious approach to monetary policy for 2025, projecting two rate cuts amidst a backdrop of elevated inflation and subdued economic growth. This decision reflects the Fed's delicate balancing act between controlling inflation and supporting economic activity. The central bank's latest projections indicate that global growth is expected to moderate from 3.2% in 2024 to 3.1% in 2025 and 3.0% in 2026, with higher trade barriers and increased policy uncertainty weighing on investment and household spending.

The Fed's decision to project two rate cuts in 2025 comes as inflationary pressures persist in many economies. Headline inflation is expected to fall from 3.8% in 2025 to 3.2% in 2026 in the G20 economies, but underlying inflation is projected to remain above central bank targets in many countries. This suggests that while inflation may be moderating, it is not yet under control. The Fed's cautious approach aims to manage these risks without disrupting the ongoing disinflation process.



The divergence in growth paths among major economies is a key factor driving the Fed's decision. The United States is expected to experience robust growth, with an upward revision in its forecast offsetting downward revisions in other major economies. In contrast, the Euro area is projected to have a subdued growth rate of 1.0% in 2025 and 1.2% in 2026, due to heightened uncertainty. Additionally, China's growth is expected to slow from 4.8% in 2024 to 4.4% in 2026, influenced by factors such as the continued correction in the property sector and low confidence in the private sector.

The Fed's cautious approach to interest rate adjustments presents both potential risks and benefits. On the one hand, it aims to manage inflation risks and provide a predictable environment for businesses and consumers. On the other hand, it carries the risk of an economic slowdown, persistent inflationary pressures, and financial market volatility. The Fed's decision to keep the policy rate stable throughout 2025 is aimed at achieving a soft-landing scenario, where inflation is brought under control without causing a significant economic slowdown.

In summary, the Fed's projection of two rate cuts in 2025 reflects a cautious approach to monetary policy amidst elevated inflation and subdued economic growth. The central bank's decision aims to manage inflation risks and support economic activity, but it also carries potential risks. The divergence in growth paths among major economies highlights the varying economic conditions and policy environments in different regions, contributing to the overall global growth outlook. The Fed's cautious approach to interest rate adjustments is aimed at achieving a soft-landing scenario, where inflation is brought under control without causing a significant economic slowdown.