In 2025, the Fed Will Have to Cut Rates Four Times Due to the Coming Global Interest Rate Collapse

Federal Reserve Chair Jerome Powell appears to have lost the cohesion he once maintained within the Federal Open Market Committee (FOMC), adding uncertainty to the Fed's policy direction. Last week’s FOMC meeting unsettled Wall Street, highlighting growing divisions within the central bank.

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The announcement of a rate cut on December 18 revealed three major points of contention among FOMC members: differing views on the health of the U.S. economy, disagreements on how many additional rate cuts are needed, and uncertainty about whether inflation is beginning to accelerate.

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The December FOMC statement and accompanying “dot plot” signaled a pivot in the Fed’s priorities. Policymakers are shifting their focus from unemployment back to controlling inflation. The dot plot now indicates the Fed plans to pause after delivering two more rate cuts in 2025, a downgrade from the four cuts projected in previous forecasts.

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However, this plan may prove insufficient. Economic conditions are likely to compel the Fed to deliver four rate cuts in 2025. Declining interest rates in the eurozone will exert downward pressure on U.S. Treasury yields during the latter half of the year, further necessitating rate reductions by the Fed.

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The decline in global interest rates is only beginning. The European Central Bank (ECB) is expected to cut its key rates four to five times in 2025, bringing them to a range of 2% to 1.75%. These rate cuts reflect deepening economic struggles in the eurozone, particularly in its two largest economies, Germany and France. Germany's recession is worsening, while France is also sliding into economic contraction. Both nations face political crises, leaving them effectively "leaderless" until new governments can stabilize the situation.

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The challenges extend beyond Europe. Brazil is grappling with significant economic instability. The country is facing a 10% budget deficit, a president recovering from emergency brain surgery, and rampant government spending.

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These factors are eroding confidence in Brazil’s currency, the real, which has fallen 21% against the U.S. dollar this year. Currency depreciation has led to severe inflation, undermining the government’s efforts to support the country’s poorest citizens. Despite President Lula da Silva's intentions to help the underprivileged, inflationary policies are exacerbating their struggles.

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China’s economic growth is also faltering as its population continues to decline by over 2 million people annually. Against this backdrop of global instability, the U.S. remains a beacon of economic resilience, continuing to act as the world’s growth engine.

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Falling interest rates worldwide are expected to drive capital into U.S. Treasurys, pushing their yields lower. Given the Fed’s historical tendency to align with market-driven rates, it seems increasingly likely that the central bank will implement four rate cuts in 2025.

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Disagreement among FOMC members became evident last week. Cleveland Fed President Beth Hammack argued for maintaining current rates until inflation shows more definitive signs of cooling. Hammack stated, “Based on my estimate that monetary policy is not far from a neutral stance, I prefer to hold policy steady until we see further evidence that inflation is resuming its path to our 2% objective.”

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Inflation, however, appears to be edging closer to the Fed’s target. In November, the Personal Consumption Expenditure (PCE) index rose just 0.1%, marking the smallest monthly increase since May. Over the past 12 months, the index climbed 2.4%. Excluding food and energy, core PCE rose 0.1% in November and 2.8% year-over-year. When shelter costs are removed from the equation, inflation is effectively at the Fed’s 2% goal.

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Fed Chair Powell’s remarks about the Fed’s inflation forecast having “kind of fallen apart” did little to inspire confidence. Nevertheless, the sharp negative reaction in stock and bond markets to the FOMC statement, dot plot, and Powell’s press conference may have been exaggerated.

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Adding to the market’s unease was the looming threat of a federal government shutdown. However, as is often the case, legislators passed a bill to keep the government operating through March, averting a crisis. President-elect Donald Trump has suggested eliminating the federal debt ceiling, which could prevent such recurring political dramas in the future.

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With global economic and political turmoil mounting, the Fed is likely to face mounting pressure to adapt its policy stance. As collapsing interest rates abroad fuel demand for U.S. assets, and inflation trends near the Fed’s target, the case for four rate cuts in 2025 appears increasingly compelling. Despite internal disagreements, the Fed’s actions will ultimately hinge on evolving domestic and global conditions.

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