Doha: QNB expects the U.S. Federal Reserve to continue reducing interest rates later in 2025, despite inflation staying above the target level and the possibility of short-term inflationary pressures from new tariffs.
According to Qatar News Agency, in its weekly report, QNB noted that, over the past few years, the Federal Reserve has been at the forefront of macroeconomic and investment discussions. This prominence comes from the critical role of interest rates and quantitative measures in shaping growth, liquidity, and inflation. However, in recent months, an array of policies adopted by President Donald Trump’s administration has significantly altered the foundations of those discussions and reshaped areas of focus.
The report noted that a key driver behind the Federal Reserve’s moves has been concern over potential economic overheating that could push inflation higher if the president were to implement the broad expansionary measures suggested during his election campaign. As the new administration began its work, with priorities such as imposing new tariffs and strengthening government efficiency, the balance of risks threatening U.S. economic forecasts quickly shifted from worries about overheating to a more pressing possibility of recession.
According to QNB, this shift has caused a decline in both investor and consumer sentiment. Stock market indices fell into correction territory, and both retail sales and weaker consumer confidence indicators were sluggish.
Citing the Federal Reserve Bank of Atlanta’s current forecasting model, the report noted that U.S. gross domestic product (GDP) is expected to contract by 2.8 percent in the first quarter of 2025, compared to 2.3 percent growth in the preceding quarter. This suggests a stark and rapid change in the U.S. economy’s trajectory.
QNB underscored that the Federal Reserve must still operate amid high uncertainty. Monetary policy tools, the report added, are crucial in easing potential adverse effects from unpredictable events or negative shocks arising from the political sphere. Nonetheless, this level of ambiguity makes managing policy especially challenging for the Fed.
The report went on to say that medium-term interest rates have swung significantly, reflecting shifting market expectations about both the timing and direction of federal funds rates over the coming quarters. Two-year Treasury yields rose in the final quarter of last year, reversing the declines seen in the second and third quarters of 2024. Those earlier drops were fueled by rapidly falling inflation rates and forecasts of aggressive monetary easing, at a time when President Trump’s pro-growth messaging dominated the U.S. election cycle. By contrast, from February 2025 onward, strict trade measures and government efficiency policies have weighed on both investor and consumer confidence, pushing bond yields back down.
The report pointed out that investors currently foresee the Federal Reserve resuming its interest-rate cutting cycle, which started in September 2024. Market sentiment anticipates four additional 25-basis-point reductions by the end of 2025, with further cuts likely in 2026. According to QNB, this aligns with the broader economic environment, allowing enough room for more monetary easing. Two factors in particular support this expectation of lower rates.
First, comments from Federal Reserve officials suggest openness to additional rate reductions later in the year. The “dot plot” from March 2025 lines up roughly with prevailing market sentiment. The dot plots outline where each member of the Federal Open Market Committee sees the target range. Most officials believe the economy is slowing gradually and that inflation is returning to more normal levels. Any boost to inflation from tariffs, they argue, would be short-lived and may be largely overlooked.
Second, the report observed that the weakening economy and sliding market confidence make cutting interest rates feel increasingly necessary rather than optional. Capacity utilization rates have declined, and the labor market has moved away from full employment, with unemployment climbing to 4.5 percent in February 2025. This environment, QNB explained, builds the case for bringing interest rates down to around 4 percent considered neutral in the quarters ahead.
In conclusion, although inflation remains above target and there is a likelihood of temporary inflationary pressure tied to tariffs, QNB expects the Federal Reserve to continue lowering interest rates later in 2025. With the economy slowing, there is a clear need to shift from a tighter monetary policy stance at 4.5 percent to a more neutral rate of around 4 percent, in order to forestall a potential recession.