US Rate Futures Price in Fed On Hold in January, Two Cuts in 2025 - LSEG Estimates

The Federal Reserve's recent interest rate cuts have been a hot topic in the financial world, with markets pricing in a pause in January and two additional cuts in 2025, according to LSEG estimates. As the Fed continues to navigate the delicate balance between keeping inflation in check and maintaining a healthy labor market, investors are eager to understand the implications of these projections for various sectors and asset classes.

The Fed's decision to hold rates steady in January comes as no surprise, given the recent inflation data and the uncertainty surrounding the incoming Trump administration's policies. While the Fed has been data-dependent in its approach to monetary policy, the prospect of new policies like tariffs and tax cuts could exacerbate price pressures, prompting the central bank to take a wait-and-see approach.

For consumers and businesses, the Fed's pause in rate cuts may lead to a slowdown in the decline of borrowing costs. Credit card debt, which is typically tied to the prime rate, may see a slower pace of reduction in interest rates. On the other hand, auto loans and mortgages, which are influenced by the 10-year Treasury yield, may continue to decline, albeit at a slower pace. The Fed's pause in rate cuts could also affect the demand for new loans, with businesses and consumers potentially delaying borrowing until rates resume their downward trend.



The Fed's projected two rate cuts in 2025 suggest a more gradual pace of monetary tightening, which could lead to lower long-term interest rates and bond yields. This is because the Fed's policy rate influences long-term rates through expectations of future policy. A slower pace of rate hikes could result in lower long-term rates, making bonds more attractive to investors. However, the actual impact on long-term rates and bond yields will depend on various factors, including economic growth, inflation, and market sentiment.

The Fed's January decision and 2025 projections are likely to influence interest-sensitive sectors such as housing, auto loans, and other consumer borrowing. Mortgage rates may see a modest decline, potentially falling from the current 6.60% to around 6.40% by the end of 2025. Auto loan rates may also decrease, potentially falling from the current 6.8% to around 6.5% by 2025. However, these changes are unlikely to significantly impact consumer behavior, as the Fed's gradual approach may not provide the substantial rate relief borrowers were hoping for.

Inflation trends and labor market dynamics significantly influence the Fed's rate cut projections for 2025. Recent data shows that inflation has been relatively firm, with the annual inflation rate in the US rising for the second consecutive month to 2.7%. The robust labor market, which added 227K jobs in November, surpassing forecasts, suggests that the Fed may revise its forecasts for 2024 to reflect higher inflation, lower unemployment, and stronger economic growth than previously anticipated. However, the Fed remains data-dependent and will likely take a wait-and-see approach, balancing the need to keep inflation in check with maintaining a healthy labor market.

Geopolitical tensions and potential policy changes under the incoming Trump administration are complicating the Fed's outlook for rate cuts in 2025. Markets currently price in two additional cuts next year, but the Fed's challenge is that the economy does not respond instantly to monetary policy adjustments. The slowdown in the US labor market is not something to be looked at on a month-to-month basis, and the prospect of new policies like tariffs and tax cuts from the Trump administration could exacerbate price pressures. Most non-partisan views on the implementation of the administration's policies are that they will be intrinsically inflationary, which could prompt the Fed to hold off on additional cuts until March or later.

In conclusion, the Fed's decision to pause rate cuts in January and project two additional cuts in 2025 has significant implications for various sectors and asset classes. While the pause in rate cuts may lead to a slowdown in the decline of borrowing costs, the Fed's gradual approach is unlikely to provide substantial rate relief for consumers and businesses. The Fed's projections for 2025 suggest a more gradual pace of monetary tightening, which could lead to lower long-term interest rates and bond yields. However, the actual impact on long-term rates and bond yields will depend on various factors, including economic growth, inflation, and market sentiment. As investors navigate the complex landscape of monetary policy and geopolitical tensions, they must remain vigilant and adapt their investment strategies accordingly.