Policies from President Donald Trump's administration, including tariffs, could push inflation higher, in turn, making the Fed less inclined to cut rates.
Making a chart of the federal funds rate in 2025 might turn out to be the easiest job in finance.
As inflation stays stubbornly high and jobs hold steady, the financial markets are pricing in a good chance that the central bank will hold its key interest rate steady through all of 2025. As of Tuesday, traders were betting that there's 18.3% chance the Federal Reserve will keep its key interest rate flat through next December, according to the CME Group's FedWatch tool, which forecasts rate movements based on fed funds futures trading data.
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That compares to a 36.6% chance they'll cut the fed funds rate one time by a quarter-point.
In a speech Monday, Federal Reserve governor Christopher Waller laid out central bankers' dilemma. The central bank wants to reduce the fed funds rate, which influences borrowing costs on all kinds of loans, but the post-pandemic burst of inflation from late 2021 is still lingering. The question for Waller and other policymakers is whether inflation is on a trajectory down to their 2% annual goal or if it's stuck in high gear.
Rate cuts are on the table if inflation starts to cool down in the coming months, but that's far from certain. And in the meantime, the Fed is on "pause."
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"The data are not supporting a reduction in the policy rate at this time," Waller said at an economic workshop in Australia. "But if 2025