The Federal Reserve’s aggressive interest rate cuts are expected to moderate in 2025, according to Wells Fargo. Sarah House, a senior economist at the bank, predicts the Fed will likely transition to cutting rates “once every other meeting” as we enter the new year. Her team anticipates three rate cuts in total for 2025.
This view reflects a broader consensus on Wall Street. While the precise timing and magnitude of future cuts remain a subject of debate among policymakers, economists generally agree that the current rapid pace of reductions is unsustainable. Current market expectations, as reported by Bloomberg, price in approximately two rate cuts in 2025. The Fed is scheduled to release its updated economic projections on December 18th, which will offer further insight into the central bank’s thinking.
Wells Fargo’s outlook aligns with projections from other major financial institutions. Economists at both Morgan Stanley and JPMorgan Chase also anticipate a similar trajectory for the federal funds rate, forecasting it to settle within the 3.5% to 3.75% range by the end of 2025.
Meanwhile, Societe Generale offers a different perspective on the yield curve. They predict that while the Fed’s continued rate cuts will push down short-term interest rates, leading to a 2-year Treasury yield of 3.5% by the end of 2025, long-term rates are expected to rise. They forecast the 10-year Treasury yield to reach 4.5% during the same period.
Societe Generale attributes this divergence to several factors. They argue that the Fed’s easing policy, while lowering short-term rates, will also stimulate economic growth and widen the fiscal deficit. This increased government borrowing will boost demand for long-term Treasury bonds, driving up their yields. Additionally, potential inflationary pressures from tariffs and increased Treasury bond issuance to finance the deficit are expected to contribute to higher long-term rates. This dynamic could lead to a steeper yield curve, with long-term rates significantly exceeding short-term rates.
