Interest Rate Projections for 2025: A Shifting Fed Strategy

In 2024, the Fed reduced interest rates by a full percentage point, bringing the range to 4.25%-4.50%. Inflation, as measured by the Fed’s preferred index, fell significantly from its mid-2022 peak of about 7% to 2.4% in November. However, this figure remains above the Fed’s 2% target, and progress toward this goal is expected to be slower than previously anticipated.

Speaking at the American Economic Association conference, Governor Adriana Kugler remarked, “We are fully aware that we are not there yet—no one is celebrating. At the same time, we want unemployment to remain stable and not rise rapidly.” In November, the unemployment rate stood at 4.2%, a level that both Kugler and San Francisco Fed President Mary Daly believe aligns with the Fed’s dual mandate of price stability and maximum employment.

Daly added that while some monthly fluctuations in labor data are expected, she does not want to see further weakening in the job market. Both officials avoided commenting on the potential effects of the new administration’s economic policies, such as tariffs and tax cuts, which could stimulate growth but also reignite inflation.

Roger Hallam, global head of rates at Vanguard, noted that political and economic uncertainties could lead to further caution. “A skip in January could easily extend into a longer pause,” he said. Despite ongoing inflation concerns, a robust economy and potential inflationary pressures from new fiscal policies could even lead the Fed to consider rate hikes, though this remains a less likely scenario.

Fed Chair Jerome Powell hinted during the December meeting that current rates are nearing a level of balance, a reason for the central bank’s cautious stance. “The Fed wants to avoid cutting rates too aggressively and reigniting inflationary pressures,” Powell stated.

Hallam agreed, suggesting that as long as inflation appears manageable and policy remains restrictive, the Fed is likely to maintain a neutral-to-easing bias.

​While the Fed’s path forward remains unclear, one thing is certain: policymakers are navigating a complex economic landscape, balancing inflation concerns with the need to sustain a healthy labor market.