Why US rate cuts in 2025 could surpass current expectations

Potential for more US rate cuts in 2025

​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 for Fed action

​Hiring has largely stalled, and history indicates that this is often followed by layoffs. With the United States (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.

Influence on forex

​This labour market shift could significantly impact foreign exchange (forex) trading as currency markets adjust to changing monetary policy expectations with the US dollar weakening instead of rising further, as is widely expected. The forex market is closely watching these labour market developments as potential triggers for rate cuts.

Political influence on Fed decisions

Political influences, while subtle, often play a role in shaping monetary policy decisions. Historically, the Fed typically avoids political influence, but subtle pressures during election cycles can sway decisions.

The Trump administration’s potential influence over monetary policy might lead to more rate cuts. The administration may favour lower rates to boost economic and stock market growth, both vital to its platform.

With a renewed focus on reducing the federal deficit to 3% of nominal gross domestic product (GDP), lower rates could cut federal debt servicing costs. Scott Bessent, a key economic adviser, has publicly advocated for such measures, aligning fiscal policy goals with monetary easing.

​Waning growth drivers require supportive policy

• AI and Inflation Reduction Act

Recent years have seen significant economic momentum driven by the Inflation Reduction Act and advancements in artificial intelligence (AI). However, the boost from these drivers appears to be diminishing.

• Housing and Construction

Without new catalysts 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.

Role of tariffs and the US dollar

Concerns about tariffs and a stronger US dollar could also shape the Fed’s decisions.

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.

Strategic currency considerations

Javier Milei, an influential economist and frequent adviser 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, particularly with EUR/USD, GBP/USD and USD/JPY.

​Broader implications for markets

Investors should not dismiss the likelihood of more aggressive cuts. A dovish Fed in 2025 could greatly affect asset prices, benefiting tech and growth sectors sensitive to interest rates.

According to Steno Signals, long positions in Chicago Mercantile Exchange (CME) Group Secured Overnight Financing Rate (SOFR) futures, like SFRZ5, could be strategic. These instruments reflect broader bullish sentiment in interest-rate-sensitive sectors.

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