Market Predicts 85% Chance of Three Federal Reserve Rate Cuts by 2025

The financial markets are now projecting an 85% probability of the Federal Reserve implementing three interest rate cuts in 2025, a dramatic shift driven by new inflation and labor market data. This sentiment gained traction after the release of September’s Consumer Price Index (CPI) data on October 24, which fell short of market expectations and reinforced the ongoing narrative of easing inflationary pressures.

According to Kalshi, a leading financial prediction market, the likelihood of the Fed reducing interest rates three times in 2025 has experienced a marked surge to 85%. Prominent financial commentary platform, The Kobeissi Letter, underscored the significance, noting, “The probability of two additional rate cuts in 2025 has soared to 85%,” reflecting heightened market confidence that the Federal Reserve will adopt a more dovish monetary stance.

Easing Inflation and Weakening Labor Market Sparks Optimism

The sharp shift in market sentiment is primarily attributed to cooling inflation metrics and growing signs of strain within the labor market. September CPI data, provided by the U.S. Bureau of Labor Statistics (BLS), revealed a year-over-year increase of 3.0% and a month-over-month uptick of 0.3%. Both figures came in lower than expected, as economists had forecast increases of 3.1% and 0.4%, respectively. While the year-over-year gain nudged up from August’s 2.9%, the data suggests inflationary pressures are keeping to a manageable trajectory rather than accelerating.

Crucial insights emerged from the core CPI metric, which excludes the volatile categories of food and energy prices. In September, the core CPI rose by 3.0% year-over-year and 0.2% month-over-month—slightly cooler than August’s respective figures of 3.1% and 0.3%. These changes signal that underlying inflation trends are decelerating and align with broader expectations of declining price growth as 2025 approaches.

Concurrent challenges within the labor market have also contributed to the mounting expectation of rate cuts. Signs of economic slowing have appeared in key indicators, further nudging the Federal Reserve toward easing monetary policy to stimulate growth.

Increasing Pressure on the Federal Reserve

The Kobeissi Letter elaborated further on these developments, emphasizing, “With the Fed in a blackout period, the labor market deteriorating, and the CPI delivering a cooler-than-expected reading, the case for rate cuts is only becoming stronger.” The commentary suggests that the Federal Reserve's policy levers may be narrowing as economic conditions consistently point toward softer inflation and labor market challenges.

Notably, the argument for rate reductions draws support from the prospect that the Federal Reserve’s aggressive tightening measures thus far may have already imposed significant strain on economic growth. The story emerging from recent data portrays a slowing economy, with inflation cooling and labor market cracks becoming increasingly visible, fostering the conditions for an interest rate easing cycle by 2025.

Market Braces for Dovish Turn by 2025

The narrative growing around Federal Reserve policy signals that the central bank might soon pivot from its current stance. With earlier rate hikes possibly achieving their intended economic dampening effects, market participants are preparing for policy adjustments to sustain economic stability. The anticipated rate cuts would reverse the Fed’s recent tightening campaign, lowering borrowing costs and providing breathing room for businesses and consumers.

As the global economy navigates these signals, the financial markets have demonstrated a remarkable confidence in predicting a dovish shift for the Federal Reserve in the next two years. Should inflation continue to soften and labor market weakness persist, the probability of three rate cuts in 2025 may prove prescient—a reflection of the brewing economic transition underway.