The Federal Reserve has laid out fresh guidance on the future of interest rates, and it’s a mixed bag for investors and consumers alike. While economic growth appears to be slowing, the central bank sees room for up to two rate cuts in 2025, offering some relief amid rising unemployment and stubborn inflation.
Economic Growth Forecast Takes a Hit
The Fed’s latest Summary of Economic Projections (SEP), released last week, paints a weaker picture of the U.S. economy than previously expected. Growth forecasts for 2025 now stand between 1.6% and 1.9%, a downgrade from the 2% to 2.3% range projected in December.
Inflation, too, is proving sticky. The Fed now expects the Personal Consumption Expenditures (PCE) index—a key measure of price increases—to land between 2.7% and 2.8% next year. That’s a step up from the prior 2.5% to 2.6% estimate, signaling that price pressures are lingering longer than hoped.
And then there’s unemployment. The jobless rate is expected to rise to 4.4% or even 4.5%, up from the current 4.1%. That’s still low by historical standards, but the trend isn’t reassuring.
Rate Cuts Could Provide Some Relief
Despite the economic slowdown, the Fed remains committed to easing monetary policy. Its projections suggest the federal funds rate will settle between 3.88% and 4.12% by the end of 2025. That means up to two rate cuts from the current level of 4.37%.
Wall Street, however, sees a slightly different path. The CME Group’s FedWatch tool suggests traders are betting on three cuts this year. If that happens, borrowing costs for businesses and consumers could come down faster, potentially softening the economic blow.
One sentence to break things up.
How Rate Cuts Impact the Stock Market
Lower interest rates can be a boon for stocks. They make bonds and cash savings less attractive, nudging investors toward equities. Companies also benefit from lower borrowing costs, which can boost earnings and drive stock prices higher.
But history tells us it’s not always that simple. Since 2000, every time the Fed has started cutting rates, the stock market has experienced a correction of at least 10%:
| Year | Rate Cuts Begin | Market Correction |
|---|---|---|
| 2000 | Dot-com crash | S&P 500 dropped 49% |
| 2008 | Financial crisis | S&P 500 plunged 57% |
| 2020 | COVID-19 crash | S&P 500 fell 34% |
That’s not to say cuts are a bad thing—just that they often coincide with economic weakness. And with GDP growth slowing and corporate earnings under pressure, volatility could be on the horizon again.
Warning Signs in the Economy
Several key indicators suggest trouble could be brewing:
- Rising Unemployment: The jobless rate has ticked up over the past year, and the Fed sees it climbing further.
- Weak Consumer Sentiment: The University of Michigan’s Consumer Sentiment Index fell to 57.9 in March, its lowest level since 2022.
- Trade Policy Concerns: Goldman Sachs recently trimmed its U.S. GDP forecast to 1.7%, citing trade tensions and potential tariff increases.
Meanwhile, big-name analysts are rethinking their stock market targets. Goldman Sachs now sees the S&P 500 reaching 6,200 this year, down from its previous forecast of 6,500. Yardeni Research and RBC Capital Markets have also lowered their projections.
Despite the uncertainty, long-term investors should remember that markets tend to recover. The S&P 500 is still 8% below its record high, and history suggests corrections often provide buying opportunities. While the road ahead may be bumpy, patience could pay off in the end.
