The Federal Open Market Committee reconvenes Tuesday for its second meeting of the year, renewing questions of whether the Federal Reserve will ease interest rates in 2025. In January, the Fed’s 12-member committee held the benchmark federal funds rate steady after three rate cuts in 2024 that left the rate at which banks borrow from one another at 4.25% to 4.50%.
The federal funds rate influences other borrowing rates and has an indirect impact on mortgage rates. It hovered at a range of 5.25% to 5.50% at this time last year before the Fed began cutting rates in September.
Most sources say the chance of a rate cut occurring this week is unlikely. According to the CME FedWatch Tool, which tracks fed funds futures contracts, there is only a 1% chance of a rate decrease in March. However, the probability of a rate cut increases to about 67% by June, according to CME Group data from Monday afternoon.
Among the economic data the Fed considers when determining interest-rate policy are inflation and unemployment rates. On the inflation front, the seasonally adjusted consumer price index saw a 0.2% month-over-month increase in February, which was below analyst estimates.
But the economy has become more volatile since the end of 2024. Inflation remains an issue and the U.S. unemployment rate increased slightly to 4.1% in February despite the U.S. adding 151,000 jobs in February, which was stronger than the 125,000 jobs created in January.
Consumer sentiment plummeted in March, according to a University of Michigan survey released on March 14. The survey, which uses consumer attitudes on economic issues to predict future spending and saving trends, was down 10.5% from February and 27.1% year over year.
Esther George, former president of the Federal Reserve’s Kansas City branch, told The Associated Press that the Fed faces a “tangled web” as it tries to achieve its dual mandate of maintaining both stable pricing and maximum employment.
“You have inflation stickiness on the one hand. At the same time, you’re trying to look at what impact could this have on the job market, if growth begins to pull back,” George said. “So it is a tough scenario for them for sure.”
Some of the economic wild cards making the Fed’s decisions more difficult include sweeping tariffs imposed then paused by the Trump administration and how escalating trade wars with key trading partners could impact the U.S. economy.
Eric Rosengren, former president of the Federal Reserve Bank of Boston, said in an interview with MarketWatch that he believes a weakening economy will force the Fed to cut rates once or twice this year.
“I had originally assumed that the tariffs weren’t going to be substantial, and I had no change in policy over the course of this year, but my expectation now is that the economy will weaken sufficiently that they’ll be easing, basically for the wrong reason,” Rosengren said.
