BCA Research predicts the Federal Reserve will ease interest rates by more than 50 basis points in 2025, exceeding the Federal Open Market Committee’s (FOMC) median forecast. The projection is based on expectations that core PCE inflation will fall below the Fed’s 2% target, while unemployment rates continue to rise. BCA anticipates a weaker labor market, with unemployment climbing beyond the Fed’s year-end forecast of 4.3%, slowing momentum in inflation metrics.
Core PCE inflation is expected to decline to 2.5% by early 2025 if recent trends hold, aligning with or undercutting the Fed’s targets earlier than projected. BCA notes that if inflation prints average 0.2% for three consecutive months, additional rate cuts could follow, potentially resulting in a total easing of up to 100 basis points by the end of 2025. Fed Chair Jerome Powell emphasized a data-driven approach, suggesting flexibility in rate adjustments throughout the year.
Economic uncertainties, including possible tariffs from the incoming administration, could further influence the Fed’s policy. While tariffs may temporarily increase inflation, BCA argues their impact on manufacturing could accelerate rate cuts in the latter half of the year. Additionally, quantitative tightening (QT) is expected to slow mid-year and potentially cease by late 2025 or early 2026.