2025 Rate Cut Outlook: What’s Keeping the Fed on Hold?

Chart of the Month
Written By Jonathan M. Elliott, CPWA®, CRPC®, CDFA®, ChSNC®, CPFA™, RMA®

Photo Credit: Ian Keefe, Unsplash

In recent years, the Federal Reserve carried out one of the fastest rate-hiking campaigns in history to bring inflation down from a multi-decade high. After holding rates high for over 12 months, the central bank started its current rate-cutting cycle in late 2024, lowering rates by a total of -1% between September and the end of December.

Where do things stand now?

The central bank has two main objectives, which are (1) price stability, which means low and stable inflation, and (2) full employment, which refers to conditions that create new jobs and keep unemployment low. The charts below show that the balance between those two goals shifted in early 2025.


Consumer Price Index (CPI% Year Over Year Change)

The first chart above graphs the year-over-year change in the Consumer Price Index (CPI), which measures the change in price for a basket of goods and services. It shows that inflation progress has slowed. In January 2025, CPI rose by +0.5% from the previous month, the largest increase since August 2023. This caused the annual inflation rate to rise to +3.0% compared to December’s +2.9%. While inflation has fallen significantly from its mid-2022 peak of around 9%, progress has stalled, with CPI hovering around 3% since late 2023. This recent data has added concerns that inflation could remain above the Fed’s 2% target for an extended period.


US Unemployment Rate

The second chart graphs the U.S. unemployment rate, revealing a strong labor market by historical standards. In January, unemployment fell by -0.1% to 4.0%, the lowest since May 2024. Monthly job growth totaled +143,000, a slowdown from the post-pandemic hiring boom but indicative of steady labor demand. Additionally, job revisions for November and December 2024 were positive, with the U.S. adding +100,000 more jobs than initially reported. While the Fed cited rising unemployment as a reason to start cutting in 2024, recent data suggests the labor market isn’t weakening as much as previously thought.

The latest CPI and unemployment reports underscore the complex economic landscape facing the Fed and the market. The central bank began cutting rates in 2024 as its focus shifted from reducing inflation to supporting the labor market. However, with inflation progress stalling and the labor market holding firm, many believe the Fed will pause its rate-cutting cycle until there is more clarity on both fronts. Reflecting this shift, the Fed held interest rates steady at its January 2025 meeting after three consecutive cuts from September to December 2024. Fed Chair Jerome Powell has also signaled a more patient approach, stating, "We don't need to be in a hurry" to adjust rates given current economic conditions. Market expectations have adjusted accordingly, with the next rate cut now anticipated in June 2025.

 

Important Disclosures
This material is provided for general and educational purposes only and is not investment advice. Your investments should correspond to your financial needs, goals, and risk tolerance. Please consult an investment professional before making any investment or financial decisions or purchasing any financial, securities, or investment-related service or product, including any investment product or service described in these materials.

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In recent years, the Federal Reserve carried out one of the fastest rate-hiking campaigns in history to bring inflation down from a multi-decade high. After holding rates high for over 12 months, the central bank started its current rate-cutting cycle in late 2024, lowering rates by a total of -1% between September and the end of December. Where do things stand now?

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Jonathan M. Elliott, CPWA®, CRPC®, CDFA®, ChSNC®, CPFA™, RMA®

I am currently the Managing Partner for our independent investment advisory firm, Optima Capital Management. Together with my business partners, Todd Bendell CFP® and Clinton Steinhoff, we founded Optima Capital in 2019 as a forward-thinking wealth management firm that serves as an investment fiduciary and family office for high-net-worth individuals and families. In addition to being the Chief Compliance Officer, my role at Optima Capital is portfolio management. I have over 18 years of experience in managing investment strategies and portfolios. I specialize in using fundamental and technical analysis to build custom portfolios that utilize individual equities, bonds, and exchange-traded funds (ETFs). I began my financial services career with Merrill Lynch in 2003. At Merrill, I served in the leadership roles of Market Sales Manager and Senior Resident Director for the Scottsdale West Valley Market in Arizona. On Wall Street Magazine recognized me as one of the Top 100 Branch Managers in 2017. I am originally from Saginaw, Michigan, and a marketing graduate from the W.P. Carey School of Business at Arizona State University. I am a Certified Private Wealth Advisor® professional. The CPWA® certification program is an advanced credential created specifically for wealth managers who work with high net worth clients, focusing on the life cycle of wealth: accumulation, preservation, and distribution. In addition, I hold the following designations - Chartered Retirement Planning Counselor (CRPC®), Certified Divorce Financial Analyst (CDFA®), Certified Plan Fiduciary Advisor (CPFA), and Retirement Management Advisor (RMA®). In the community, I am a member of the Central Arizona Estate Planning Council (CAEPC) and serve as an alumni advisor and mentor to student organizations at Arizona State University. My interests include traveling, outdoors, fitness, leadership, entrepreneurship, minimalism, and computer science.

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