The Fed Is Unlikely To Cut Interest Rates In January Due To Inflation
The Federal Reserve cut interest rates by 0.25% on December 18 but an interest rate cut is unlikely when the Fed issues its next policy decision on January 29. Elevated levels of consumer inflation combined with the latest Federal Open Market Committee member forecasts of future interest rates imply a meeting without an interest rate policy change is unlikely to surprise market mavens and economists. However, the pace and timing of Fed rate cuts beyond January are less clear. Multiple interest rate cuts are likely in 2025—and perhaps more cuts than the latest FOMC projections suggest.
Fed Policy Is Likely To Be On Hold in January
On December 18, the Federal Reserve cut the federal funds rate by 0.25%, targeting a range between 4.25% and 4.50%, which was widely expected. A similar rate cut at the next Fed meeting on January 29 is unlikely.
With elevated U.S. consumer inflation rates and still low unemployment rates, the Fed is not under pressure to cut interest rates urgently. Plus, the December 2024 Fed statement was accompanied by FOMC projections that reflected only two likely 0.25% rate cuts in 2025. The previous September 2024 projections reflected expectations of four likely 0.25% rate cuts in 2025.
Understandably, the December FOMC projections dampened expectations for 2025 interest rate cuts.
The odds of a January 2025 Fed rate are now very slim. According to the CME FedWatch Tool, the chance of a Fed interest rate cut by 0.25% on January 29 was only 7.5% as of December 23 at 6:33 a.m. ET. Meanwhile, the odds of no change in Fed policy were at a very high 92.5%.
Inflation Is Holding Back Fed Rate Cuts
While rising year-on-year consumer inflation rates did not keep the Fed from cutting rates in December, the outlook for the January Fed meeting is different because year-on-year total CPI and core CPI rates are likely to accelerate further in the December CPI consumer inflation report that will be released in January.
November year-on-year consumer inflation rates are already elevated, with total Consumer Price Index at 2.7%, core CPI at 3.3%, total PCE inflation at 2.4%, and core PCE at 2.8%. Total year-on-year CPI and PCE consumer inflation rates are likely to fall to the Fed’s 2% target in 2025, but they are currently above target—and core inflation rates could remain above the Fed’s 2% for most or even all of 2025.