How many Fed cuts are coming in 2025?
Pullbacks in the stock market have been rare, brief, and not too deep in the back half of 2024. But all 3% drops from the highs for the S&P 500 have come when markets either expect the Fed to cut a lot (early August and early September) or barely at all (late December). Should hot inflation prints in Q1 (which have been common in the past few years) push this number above 4.13% (i.e., doubting whether any easing will be delivered), that could prove a headache for stocks. Same story if any unwelcome cooling in the jobs market sends this yield sharply lower.
The sweet spot for market expectations on where the federal funds rate will sit at the start of 2026 is probably somewhere between 3.25% and 4%, a level that would imply inflation isn’t enough of a problem to prevent further easing, but any deceleration in growth or labor-market softness isn’t severe enough to warrant rapid, significant cuts.
In any event, where this metric trades is going to be a good lens into the market’s near-term outlook for NGDP growth (that is, real growth plus inflation). That’s critical for sales growth, which, with profit margins being as high as they are, offers very efficient fuel for earnings growth.
