The U.S. Federal Reserve (Fed) held its Federal Open Market Committee (FOMC) regular meeting in December and decided to lower the benchmark interest rate by 0.25 percentage points but indicated that it may adjust the pace of rate cuts in 2025. This is because the U.S. economy is strong enough that it does not need to cut rates urgently. However, the securities industry noted that it must take into account the variables of employment and the second term of the Donald Trump administration.
According to the financial investment industry on the 19th, the Fed presented the median forecast for the 2025 benchmark interest rate at 3.9%. This is an increase of 0.5 percentage points from the 3.4% forecast in September. Under the 'baby cut' (0.25 percentage point reduction) scenario, this means that the number of expected rate cuts for 2025 has been reduced from 4 to 2. The Fed also adjusted the median forecast for the 2026 benchmark interest rate up from 2.9% to 3.4%, indicating that the pace of rate cuts might continue for an extended period.
Jerome Powell, the chair of the Fed, said at a press conference following the FOMC, '(The rate cuts) have entered a new phase,' and explained, 'By using the terms 'extent' and 'timing' in the monetary policy direction document announced today, it signals that we have reached or are near an appropriate point to slow the pace of additional rate adjustments.'
The securities industry's outlook for the number of rate cuts in 2025 is becoming conservative in light of this position from the Fed. Daol Investment & Securities forecasts one rate cut in the second half of 2025, while Mirae Asset Securities predicts two cuts total, with one in each of the first and second halves of 2025.
However, there are still considerable opinions that the Fed could lower interest rates three times in 2025. First, employment is a variable. The U.S. unemployment rate recorded 4.2% in November, indicating that the unemployment rate for 2025 might exceed the Fed's forecast of 4.3%.
Jeon Gyu-yeon, a researcher at Hana Securities, stated, 'Chair Powell noted, “If the economy and the labor market are robust, we may be cautious about additional rate cuts,” which means the premise conditions must be met for the pace adjustments to be possible if the labor market does not weaken,' adding, 'Considering the unemployment rate, I expect the Fed could implement three rate cuts in 2025.'
The tariff policies of the Trump administration or the immigrant control policies are also cited as factors that could influence the Fed's pace of rate cuts. Both the increase in import prices due to tariff hikes and the wage increases resulting from a decrease in the immigrant workforce, which provided low-wage labor, could stimulate inflation. Chair Powell also mentioned that some Fed commissioners have conditionally reflected the potential impacts of these policies on prices.
Choi Je-min, a researcher at Hyundai Motor Securities, stated, 'The policy uncertainty of the Trump administration could heighten inflation risks in 2025, leading the Fed to adopt a cautious approach,' while also noting, 'Given the enhanced hawkish stance of the Fed, the financial conditions may deteriorate, which could partially offset the pressures on the economy and inflation, thus maintaining the outlook of three rate cuts in 2025.'
Lee Nam-gang, a researcher at Korea Investment & Securities, added, 'If a majority of the (Fed) commissioners start reflecting the policies of the Trump administration in their forecasts, the neutral rate could rise further (up to 3.3%),' while also projecting, 'I foresee three rate cuts in 2025.'