Analyst unveils surprising Fed interest rate cut prediction

Here's what could happen to interest rates next.

May 6, 2025 - 20:23

Analyst unveils surprising Fed interest rate cut prediction

The Federal Reserve will issue its latest decision on interest rates on Wednesday, May 7.

Those hoping for relief on mortgages, credit cards, and other loans will likely be disappointed. The Fed is currently caught between a rock and a hard place, trapped by a dual mandate of low inflation and unemployment, goals that often contradict one another.

Reducing interest rates shores up employment but triggers inflation, while raising interest rates reduces inflation but causes unemployment.

The monetary policy tug-of-war is particularly hard-won this year, given that we're experiencing sticky inflation and more layoffs. That's made picking the proper mandate to target particularly tough.

*Federal Reserve Chairman Jerome Powell may not cut interest rates until later this year.*
Image source: Chip Somodevilla/Getty Images

The Fed juggles inflation and unemployment threats

Unemployment has picked up following the Fed's most hawkish policy in decades. After admitting inflation wasn't transitory, Fed Chair Powell embarked on the most restrictive pace of interest rate hikes since Fed Chair Volcker battled inflation in the early 1980s.

As a result, inflation has retreated, but higher interest rates have capped economic activity, contributing to the unemployment rate rising to 4.2% from a low of 3.4% in 2023.

The uptick in unemployment prompted the Fed to cut interest rates in September, November, and December. However, inflation risks have escalated this year, even as the job market wobbles.

In February, President Trump announced 25% tariffs on Canada, Mexico, and autos. He followed up those tariffs by announcing additional reciprocal tariffs on most imports on April 2. He paused many reciprocal tariffs on April 9, pending trade negotiations. Still, he left in place a 10% baseline tariff and escalated a trade war with China that lifted Chinese tariffs to 145%, effectively shuttering trade between the two economic giants.

Since tariffs are paid by the company importing the goods, they can increase inflation. Companies must either pass higher costs on to consumers or take the hit to their bottom lines.

The risk that tariffs reignite inflation is particularly troublesome for the Fed, given there's been little progress on inflation since last Fall. The Consumer Price Index showed inflation was 2.4% in March, matching the level from last September.

Analyst makes bold interest rate cut prediction

Most Fed watchers expected the Fed to continue cutting interest rates in 2025, given that they reduced rates by 1% in the final months of 2024.

Those hopes, however, have continuously been dashed by ongoing data and policy announcements, resulting in a major re-ratcheting of interest rate cut forecasts.

For example, the April jobs report data clocked in better than expected, with 177,000 jobs created versus Wall Street estimates for job growth of 138,000. The unemployment rate stayed the same at 4.2%, but absent a major downtick in jobs growth, the Fed has little urgency to cut rates into tariff-driven price increases.

Similarly, recent GDP data showed the U.S. economy contracted 0.3% in the first quarter. That's concerning for future job growth, but imports ahead of tariffs and spiking gold trading activity were major reasons for the negative GDP print. Back out those impacts, and the economy likely grew 2% to 3%, about in line with the fourth quarter.

As a result, market participants' interest rate cut bets have changed dramatically. The odds of a cut on May 7 are just 3%, down from 33% one month ago, according to the CME's FedWatch tool. Odds for a cut in June have tumbled to 31% from 60% one week ago.

The changing rate outlooks may still be too optimistic, though.

Skyler Weinand, chief investment officer at Regan Capital, an asset manager with over $1 billion in money under management, told TheStreet in an interview that he'd be surprised if the Fed did any more rate cuts until later this year.

More Economic Analysis:

"They have fully disclosed that they're not doing squat," says Weinand. The Fed seems to be waiting for a lot more data to emerge before making any type of decision. "I don't think the Fed really has anything to do until the fall, September, maybe November," he adds.

Of course, much depends on how inflation and jobs data between now and then pan out. Still, there's little evidence that the Fed has to rush to lower rates, despite President Trump's strong objections.

"They're not going to do anything in May but call it September. Sometime in the fall we could see upwards of a 50, maybe even a 75 basis point cut if employment gets materially worse," concludes Weinard.