Traders Revisit Bets on Two Fed Rate Cuts in 2025

As the Federal Reserve's third interest rate cut of the year looms, traders are once again betting on two rate cuts in 2025. This shift in market expectations comes amidst a backdrop of stubbornly high inflation, economic resilience, and a potential slowdown in the labor market. Let's delve into the factors contributing to this change in sentiment and explore the potential implications for sectors like Big Tech and insurance.



Factors Driving the Shift in Market Expectations

1. Stubbornly high inflation: Despite the Fed's efforts to control inflation, it has remained above the target of 2%. Recent economic data suggests that it might be a long time before it comes down to pre-pandemic levels. This persistent inflation could force the Fed to maintain a restrictive monetary policy for longer than anticipated, potentially impacting economic growth and market valuations (St. Aubin, 2024).
2. Wild cards ahead: The economy's trajectory can turn on a dime, and some economists see warning signs in the labor market data suggesting hiring may not be as resilient as it appears. Trump's tariff policies are another major wild card: taxes on imports could push up inflation, slow the economy, or both, and the impact could depend on which of his promised tariffs the Trump administration implements and how (St. Aubin, 2024).
3. Economic resilience: The economy has remained fairly resilient under higher rates, raising questions about how quickly it will respond as rates decline. Very sharp and significant Fed rate hikes didn't have the same effect on the economy that you would have expected, and the fact that we didn't have a recession, that the unemployment rate didn't rise very much, makes you wonder: Is somehow the economy less sensitive to interest rates than it once was? (Wessel, 2024).
4. Fed's projections: Before the latest round of data, Fed officials projected only half of a percentage point of cuts in 2025, scaling back from their previous prediction from September. Minutes from the Federal Reserve policy committee’s most recent meeting in December, released Wednesday, confirmed officials were growing more concerned about inflation and more reluctant to cut rates, even before the most recent round of data (Fed minutes, 2024).
5. Market pricing: In recent weeks, every fresh bit of economic data has thrown a tiny bit of cold water on hopes in financial markets that the Fed will cut its influential federal funds rate in 2025, as it has done at its last three meetings since September. As of Wednesday, financial markets were pricing in a 15% chance that the Fed won't cut interest rates in the coming year, up from 4% a month ago, according to the CME Group's FedWatch tool (CME Group, 2024).

Potential Implications for Big Tech and Insurance

1. Big Tech:
- Lower interest rates make borrowing cheaper, which could benefit Big Tech companies that rely on debt financing for growth and acquisitions. For instance, Apple, which has a significant cash pile, might be more inclined to issue debt to fund its ambitious projects like the Apple Car or AR/VR initiatives.
- However, lower rates could also lead to a decrease in the value of Big Tech companies' cash reserves, as the opportunity cost of holding cash increases. This could potentially impact their stock prices, as seen in the past when interest rates rose, leading to a decline in tech stock prices.
- Lower rates might also lead to a decrease in the yield on tech companies' bonds, making them less attractive to income-oriented investors, potentially leading to a decrease in demand for these bonds.

2. Insurance:
- Lower interest rates can negatively impact insurance companies, particularly life insurers and annuity providers, as they rely on investment income from bonds to meet their long-term obligations. For example, in 2022, when interest rates rose, life insurers like Prudential and AIG reported lower investment income, which negatively impacted their earnings.
- Lower rates could also lead to a decrease in the yield on insurance companies' bonds, making them less attractive to investors, potentially leading to a decrease in demand for these bonds.
- On the other hand, lower rates could make it cheaper for insurance companies to issue new debt, potentially leading to an increase in their capital base, which could be used to invest in new business opportunities or to strengthen their balance sheets.

In conclusion, traders' bets on two Fed rate cuts in 2025 reflect a shift in market expectations driven by factors such as stubbornly high inflation, economic resilience, and potential labor market slowdowns. While these rate cuts could have some benefits for Big Tech and insurance companies, such as cheaper borrowing costs, they could also have negative implications, such as decreased investment income and potentially lower stock prices for Big Tech companies. It's essential to monitor the specific economic conditions and market dynamics to assess the actual impact on these sectors.