Tom G. from Frederick, MD asks: Hello Mitch, My question is about Federal Reserve policy. Do you think there’s a possibility that the Federal Reserve could actually raise interest rates in 2025? If so, how damaging do you think that would be for markets? Thank you.
Mitch’s Response:
Thanks for writing, Tom. You’re asking an important question because as investors I think it’s critical to consider outcomes that the Wall Street consensus may have ruled out. In this case, the possibility of rate hikes in 2025 versus rate cuts.
As it stands right now, CME Group’s FedWatch has the probability of a rate hike in 2025 at 0%. In the financial media and amongst economists and other prognosticators, the debate usually centers around whether the Fed will cut somewhere between one and four times. Rate hikes basically never come up.1
To be fair, I’ve also argued that I believe monetary policy is currently restrictive. The benchmark fed funds rate of 4.25% to 4.5% is well above the latest headline PCE price index print on inflation, which was 2.4% year-over-year in November. The U.S. economy’s strength in the face of higher rates has shifted where I think the “neutral rate” should be, but I still think it’s a percent below where rates are today. In other words, I see runway for more cuts from here.
Navigate ‘Peak Interest Rates’ with Confidence
The rate hikes ended in July 2023, and ever since, markets have been anticipating cuts—but they haven’t materialized. The timing of future rate changes also remains uncertain. What seems clear, however, is that the Fed is unlikely to raise rates further in this cycle, signaling we may have reached “peak interest rates.”
How should you prepare?
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That being said, the Fed has signaled that they’re becoming increasingly cautious about moving too fast towards the neutral rate, particularly as non-monetary policy forces—like high fiscal deficits and ‘risk-on’ sentiment in capital markets—are providing meaningful tailwinds to economic demand. Put another way, the U.S. economy has been growing strongly even with the benchmark fed funds rate above 4.5% or even 5%, so there is not a strong rationale to keep lowering rates with inflation still above 2%.
‘Policy uncertainty’ is also a new area of focus that may have the Fed rethinking their overall positioning. The incoming administration’s tariff, immigration, and tax policies may combine to produce some level of price pressures, and the Fed may find themselves in a position of wondering if they lowered rates too quickly. If a 10% universal tariff raises inflation above 3%, for instance, while pro-growth policies heat the economy even further, the story could easily become about whether the Fed needs to raise rates.
As for the market response, I think it would depend on why the Fed decided to pivot from cuts to hikes. If inflation heats back up because the economy is performing far better-than-expected, equity markets may wobble in the short-term in response to rate hikes but would ultimately trend higher as economic growth drives earnings growth, in my view. If the Fed is raising because tariff policy is raising prices considerably for U.S. households, that would be a problem, and the real pain would arguably come from the impact that higher inflation would have on long duration Treasury yields. A sharp move higher in yields would almost certainly elicit a corresponding downdraft in a fully valued stock market, with high-growth companies taking the hardest hit as doubts would emerge regarding the sustainability of growth.
With the era of peak interest rates here and ongoing uncertainty surrounding future Fed moves, investors are left wondering when—and if—the Fed will begin lowering rates.
To help you navigate this environment, we recommend downloading our free guide, How Investors Should Prepare for ‘Peak Interest Rates’3, which provides essential strategies, including:
- How to manage your cash balances effectively
- The implications of borrowing
- Retirement strategies in a high-rate world
- How the stock market could react
- And more…
If you have $500,000 or more, click the link below to download your guide and stay ahead of market changes!
Disclosure
1 Wall Street Journal. January 14, 2025. https://www.wsj.com/finance/investing/what-if-the-fed-u-turns-and-raises-rates-this-year-f180855b
2 ZIM may amend or rescind the guide “How Investors Should Prepare for ‘Peak Interest Rates’” for any reason and at ZIM’s discretion.
3 ZIM may amend or rescind the guide “How Investors Should Prepare for ‘Peak Interest Rates’” for any reason and at ZIM’s discretion.
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