​​Why there may be more US rate cuts in 2025 than currently anticipated

​​​Why there may be more US rate cuts in 2025 than currently anticipated

​As 2025 begins, markets are grappling with the Federal Reserve’s (Fed) next moves on interest rates. While current market pricing reflects expectations of only 1.5 rate cuts over the year, there are compelling reasons to believe this projection is overly conservative. A combination of labour market dynamics, political pressures, and economic headwinds may push the Fed into more aggressive easing than currently anticipated.

​Labour market signals point to potential Fed action

​The forex market is closely watching labour market developments as potential triggers for rate cuts.

​Hiring has largely stalled, and history indicates that this is often followed by layoffs. With the US labour market losing steam, the Fed may need to prioritise employment over inflation control, especially if job losses mount. If job losses accelerate, consumer spending - an engine of US economic growth - could falter, prompting the Fed to step in with rate cuts to support demand.

​The Fed’s dual mandate of maximum employment and stable prices means that labour market deterioration could shift its priorities. While inflationary pressures dominated policy decisions in 2023 and 2024, a weakening job market may compel the Fed to revisit its stance, particularly if wage growth slows and unemployment rises.

​This shift could significantly impact forex trading as currency markets adjust to changing monetary policy expectations with the US dollar weakening instead of rising further, as is widely expected.

​Political pressures may accelerate rate cuts

​The Trump administration’s potential influence on monetary policy is another factor that could lead to more rate cuts. With a renewed focus on reducing the federal deficit to 3% of nominal gross domestic product (GDP), easing interest rates could significantly reduce federal debt servicing costs. Scott Bessent, a key economic advisor, has publicly advocated for such measures, aligning fiscal policy goals with monetary easing.

​Historically, the Fed has been cautious about appearing politically influenced. However, political dynamics can exert subtle pressures, particularly in an election cycle where economic performance is scrutinised. The Trump administration may favour a lower interest rate environment to stimulate economic growth and maintain robust stock market performance, both of which are critical to its political platform.

​Political influences, while subtle, often play a role in shaping monetary policy decisions.

​Waning growth drivers require supportive policy

​Recent years have seen significant economic momentum driven by the Inflation Reduction Act (IRA) and advancements in artificial intelligence (AI). However, the boost from these drivers appears to be diminishing. Without a new catalyst for growth, sectors like private housing and construction, which are closely linked to interest rates, may experience a slowdown.

​The convergence between housing and construction payrolls is a bellwether for broader economic activity. If these sectors weaken, the Fed may act pre-emptively to avoid a more pronounced economic downturn. Lower rates could also reinvigorate borrowing and investment, offsetting the loss of momentum from earlier growth drivers.

​The role of tariffs and the dollar

​Concerns about tariffs and a stronger US dollar could also shape the Fed’s decisions. While protectionist trade policies have historically been associated with economic headwinds, there are indications that the Trump administration’s use of tariffs may serve more as a negotiation tool than a long-term strategy.

​A weaker dollar would benefit US manufacturers and exporters, bolstering the broader economy. If the dollar strengthens excessively, the Fed may feel compelled to cut rates to maintain competitiveness in global markets. Javier Milei, an influential economist and frequent advisor to the Trump administration, recently remarked that Trump’s economic strategy is ultimately pro-free trade, despite his rhetoric. This perspective suggests that rate cuts could align with broader policy goals of supporting domestic industry and economic growth.

​These factors could create significant movements in currency trading with EUR/USD, GBP/USD and USD/JPY being at the forefront.

​Broader implications for markets

​Investors would be wise not to underestimate the possibility of more aggressive rate cuts. A dovish Fed in 2025 could have far-reaching implications for asset prices. Technology and growth-linked sectors, which are highly sensitive to interest rate changes, stand to benefit significantly from a lower rate environment.

​According to Steno Signals, going long on CME Group Secured Overnight Financing Rate (SOFR) futures such as SFRZ5 could be a prudent strategy. These instruments serve as proxies for broader bullish sentiment in technology and other interest-rate-sensitive sectors. With the potential for a shift in monetary policy, the opportunity for gains in such markets may be substantial.

How to trade potential rate cuts

1. ​Research US economic indicators thoroughly
2. ​Choose whether you want to trade or invest
3. ​Open an account with us
4. ​Monitor Federal Reserve communications
5. ​Implement appropriate risk management strategies

​Remember that monetary policy shifts can create significant market volatility, so careful position sizing and risk management are essential.