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Interest rates will remain unchanged

This week, federal reserve policymakers are holding a meeting where an announcement regarding interest rates is expected on Wednesday. It is likely that rates will remain unchanged due to economic uncertainty, and there will also be a description of how they will approach monetary policy for the rest of 2025.

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Consumer prices remain consistently high with February inflation at 2.8%, significantly exceeding the Fed's target of 2%, and tariffs threatening to keep prices high. Employment in the labor market remains relatively stable, but an economic downturn caused by a trade war or other shocks could undermine that stability.

Fed is in no hurry to lower rates

After the last meeting of the central bank policy held at the end of January, Fed Chair Jerome Powell stated that they are not in a hurry to lower rates, adding that policymakers will continue to monitor data on inflation and the labor market, assessing potential risks to both aspects of their dual mandate - to ensure stable prices and maximum employment. The Fed lowered rates by 50 basis points in September, followed by reductions of 25 basis points in November and December, while rates remained unchanged in January.

Expectations regarding future rates

In fact, the Fed's decision this week was predictable. Thus, Fed watchers will be particularly attentive to the central bank's forecasts regarding rates and indications on the timing of the next rate cut.

Inflation decreased to 2.8% in February ahead of the Federal Reserve meeting

According to CME FedWatch data, the market has a 99% probability that the Fed will keep the target range of the federal funds rate at 4.25% - 4.5% after the March meeting.

Regarding the future, according to the CME FedWatch tool, the market sees a 78% probability that the Fed will again keep rates unchanged in May, and the next rate cut is likely to occur in June with a 54.5% probability of 25 basis points. The highest likelihood of a second cut of that size is seen in September.

According to the CME FedWatch tool, by the end of 2025, there is a 32.2% probability that rates will be lowered by two cuts of 25 basis points to a range of 3.75% - 4%, a 28.9% probability of a third cut to a range of 3.5% - 3.75%, and a 17.8% probability of a single cut to a range of 3.5% - 3.75% this year.

Consumer confidence falls in February with the largest monthly decline in the last 4 years

Analysts and economists expressed various views on the Fed's plans to lower rates. Economist Bill Adams from Comerica Bank wrote last week that 'it's hard to say how the Fed will react to the current situation. If the Fed makes decisions regarding monetary policy based on the measures taken today, they may significantly lower interest rates in 2025. On the other hand, if they believe that fiscal policy overall will support growth after considering the decisions likely to be made later this year, they may lower interest rates slightly or not change them at all in 2025.'

'Comerica's forecast suggests that the Fed will lean towards the latter option, with a single interest rate cut of a quarter percentage point in July 2025. However, the financial markets are pricing in a more aggressive pace of rate cuts from the Fed, with a significantly higher likelihood of the first cut by June and accumulating cuts of half a percent to three-quarters of a percent by the end of the year,' Adams wrote. 'In any case, the Fed will be watching, waiting for more information about the latest shifts in policy and their impact on the economy.'

Inflation risks in December raise questions about uncertainty regarding Trump's approach and tariffs

Economists at Goldman Sachs led by Jan Hatzius wrote that despite changes in their economic forecast due to uncertainty in trade policy, they 'kept the Fed's forecast unchanged with two cuts this year and one more in 2026 to terminal rates of 3.5% - 3.75%.'

'We see two potential paths to lowering interest rates later this year. A normalization option close to neutral is still possible, but likely only if tariffs do not meet our expectations and inflation comes in lower than our forecast. The second, more likely path to lowering rates, if our forecast regarding tariffs proves correct, is 'insurance cuts' like those in 2019 aimed at guarding against recessionary risks,' the Goldman Sachs economists wrote.

They added that 'the threshold for implementing insurance cuts will be higher than in 2019, as the inflation rate is higher, and some graphical indicators of inflation expectations, particularly the Michigan series, have risen sharply.' This is partly due to the fact that 'growth risks posed by larger and broader tariffs are significantly more serious than they were in 2019.'

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Sima Shah, chief global strategist at Principal Asset Management, stated: 'We anticipate only two or three rate cuts this year given the support for inflation stability, but it is worth noting that in the event of a significant deterioration in the labor market, the Fed would prioritize employment, activating a more aggressive pace of easing monetary policy.'

The chief economist at EY, Gregory Daco, said that EY believes that the Fed is likely to 'maintain a restrictive approach over the coming months and is expected to make only two rate cuts in 2025, in June and December.'

'If the current policy uncertainty continues and market instability rises, this could lead to a closed-loop cycle on the economy and prompt some policymakers to consider a more lenient monetary policy,' Daco said. 'However, we suspect that many Federal Reserve officials would favor maintaining a restrictive stance to prevent a resurgence in inflation, especially if inflation expectations continue to rise.'