Wall Street Expects 5% Rate Cuts by 2025 as Trump Pressures Powell

Wall Street is already preparing for the eventual departure of Jay Powell from the Federal Reserve, with traders anticipating significant interest rate cuts once he leaves. The market is now expecting five quarter-point cuts by the end of next year, an increase from the four cuts anticipated just a month ago. This shift comes as Donald Trump, who is back in the Oval Office, continues to criticize Powell for not cutting rates more aggressively.

Trump has publicly labeled Powell as “Mr. Too Late,” adding pressure on the markets to expect a more dovish replacement. The political pressure is intensifying, with Trump making it clear that Powell’s cautious approach will not be tolerated in this administration. On his social media platform, Trump stated, “I mean [Powell] goes out pretty soon, fortunately, because I think he’s terrible.” He also mentioned that he has narrowed down the list of potential replacements to “three or four people.”

Among the candidates being considered for the top job are Scott Bessent, the current Treasury Secretary, and Kevin Warsh, who served on the Fed board during the 2008 financial crisis. Another contender is Christopher Waller, a current Fed governor who recently expressed support for a rate cut as early as July. This statement has further fueled market expectations of an imminent policy shift, even before Powell’s departure.

Matthew Raskin, who leads US rates research at Deutsche Bank, noted that the market is increasingly anticipating ongoing easing once the next Fed chair is in place, with a notable shift in pricing focused on mid-2025. The White House has not officially announced a successor, but market participants are already assuming that Trump will appoint someone who will align with his monetary policy preferences.

Ian Lyngen, head of US rates strategy at BMO Capital Markets, commented that the market consensus is that Powell’s replacement will be more dovish. Lyngen also pointed out that past performance of candidates, such as Kevin Warsh, who has been hawkish in the past, may not be indicative of their future actions given the current political climate.

There is growing speculation about the possibility of a shadow chair, someone who would unofficially guide the Fed’s direction before Powell’s term ends. While the White House has not confirmed this possibility, it has not denied it either, stating that no immediate decisions are forthcoming.

Within the Fed, there is a divide among officials. This week, Michelle Bowman joined Waller in advocating for a July rate cut, citing softer inflation data. This stance has led to a drop in Treasury yields on two- and five-year notes to two-month lows, signaling market expectations of further easing. However, Powell remains steadfast in his position, stating that no cuts will occur until the fall. He is waiting to assess the impact of Trump’s tariffs on prices in June and July and wants to ensure that inflation remains under control.

Inflation in May rose to 2.4%, slightly higher than the previous month but still below most economists' expectations. This lower-than-expected figure has given Fed doves like Bowman and Waller the confidence to advocate for earlier rate cuts. However, Powell continues to hold his ground, at least for the duration of his term.