New Year’s resolutions often revolve around cuts: Cutting back on drinking alcohol, cutting down on spending frivolously, cutting out mindlessly scrolling TikTok one last time before it gets banned.
One kind of cut many investors were looking forward to this year was interest rate cuts. After the Federal Reserve’s final 25 bps cut in December 2024, analysts had accepted the idea that there would probably be fewer rate cuts in 2025.
But hey, that’s a good thing, right? After all, if the economy is humming along—consumer spending is up, the labor market is healthy, GDP continues to rise—then you don’t need rate cuts to help. Last month, everyone on Wall Street agreed with this logic, then turned their attention back to their computers to finish their holiday shopping as stocks continued to rise.
Now, however, investors are back from their winter vacations and beginning to worry about what the future holds.
Paring back predictions
Last week’s blockbuster labor report revealed that the jobs market is strong—so strong, in fact, that Bank of America analysts believe that the Federal Reserve no longer has to cut interest rates at all in 2025.
“The Dec jobs report was gangbusters, with payrolls rising by 256k and the u-rate falling a tenth to 4.1%. Given a resilient labor market, we now think the Fed cutting cycle is over,” US economist Aditya Bhave wrote in a note last Friday. “Economic activity is robust. We see little reason for additional easing.”
Just last month, BofA expected to see two rate cuts in 2025. But in his note, Bhave wrote that interest rate hikes may actually be on the table if year over year core PCE rises above 3%.
Making sense of market moves
Stay up to date on the latest market news with daily analysis of the investing landscape, served up Brew-style.
To be clear, Bank of America’s opinion is an outlier…for now. Goldman Sachs, JP Morgan, and Morgan Stanley all predict two cuts in 2025, though Goldman and JPM don’t see the first cut coming until June, while Morgan Stanley thinks it will arrive in March. Barclays anticipates just one cut this June, while Citigroup is the most optimistic of the bunch, predicting five cuts—though Citigroup just pushed its first cut back from January all the way to May.
Prediction markets are less hopeful: Bettors on Kalshi upped the chances of zero rate cuts in 2025 from 15% to 25% over the last few days.
How to invest
Rate cuts may no longer be necessary to keep the economy healthy, but they were part of investors’ plans for 2025—and now that those plans are being disrupted by an economy that just won’t quit, investors are beginning to worry, and stocks are selling off.
It doesn’t help that bond yields continue to rise, making fixed income an enticing proposition for investors who want to sell out of stocks and hedge their bets in the new year. Although it’s never a good idea to panic-sell at the first sign of trouble, diversifying into fixed income isn’t a terrible plan, particularly for investors who want to redistribute profits after two straight years of +20% gains for the S&P 500.—MR