Traders Brace for Fed's Rate Cuts: Wolfe Research Predicts Three Reductions by December 2025

According to a recent analysis from Wolfe Research, stock traders should brace themselves for a potential series of interest rate cuts by the Federal Reserve, expected to occur three times before December 2025. This projection stems from a combination of declining inflationary pressures and a labor market that is gradually stabilizing. Their insights come at a crucial time, as various economic indicators released recently suggested an unexpected rise in job openings, even amid persistent inflationary conditions.

The job market data revealed a steady openings-to-unemployed ratio of about 1.1, meaning there’s roughly one job available for each unemployed individual. Wolfe Research's analysts noted this could signify a significant change in a labor market that was previously seen as boiling over with opportunities. They described it as the labor conditions moving towards a "better balance," which is good news for the economy.

While near-term strength in job demand suggests up to two cuts could occur in the current year, Wolfe analysts still maintain that a third rate reduction will likely be on the table by the end of 2025. Market participants are currently pricing in an estimated 37.5 basis points drop by the end of the year, although the initial decrease might not be fully accounted for until mid-July.

Fed officials have recently taken a cautious stance regarding any further cuts following their decision to reduce borrowing costs by a quarter percentage point in December. Traders and investors will be keenly watching the upcoming release of the minutes from the last Fed meeting, which are anticipated to shed light on policymakers' future strategies. This scrutiny is particularly salient given the unpredictability surrounding the incoming administration's tariff strategies, which have added a layer of complexity to the overall economic landscape.

In light of these developments, Fed Chair Jerome Powell highlighted the uncertainty regarding trade and fiscal proposals, comparing the challenges of making decisions in this environment to "driving on a foggy night or walking into a dark room full of furniture."

In September, estimations had anticipated a more aggressive approach with potential cuts amounting to a full percentage point in 2025. However, current projections have recalibrated to reflect only 50 basis points in reductions for this year. For traders in the stock market, this evolving situation necessitates a vigilant approach, as the Federal Reserve’s actions on interest rates will significantly influence market behavior and investment strategies.