What Will Happen to Interest Rates This Year Depends on Who You Ask

When the Federal Reserve meets again next week, it’s all but certain to hold interest rates steady. What happens after that? Well…

Photo of the Federal Reserve building
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When the Federal Reserve meets again next week, it’s all but certain to hold interest rates steady. What happens after that? Well…

In an interview with the Financial Times, Dan Ivascyn, chief investment officer at asset management giant Pimco, predicted the Fed would hold rates steady for the “foreseeable future” — or possibly even raise them. But in his video message played for world business leaders at the World Economic Forum in Davos on Thursday, newly inaugurated President Donald Trump laid out a much different vision of the future. Much, much different.

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When the Fed cut interest rates by a quarter-point in its last meeting in December, consensus opinion held that the board would institute just two more rate cuts through 2025. Since then, the reality of the Fed’s “two-handle” inflation problem — that is, inflation sticking at below 3% but above the 2% target — has begun to sink in; on Wednesday, JPMorgan CEO Jamie Dimon urged Davos attendees to make peace with sticky prices, especially with likely-inflationary tariffs en route (or, at least, supposedly en route).

Fixed-income investment juggernaut Pimco — like much of Wall Street — has come around to the “two-handle” reality:

  • According to CME Group’s FedWatch tool, traders are pricing in no movement in next week’s Fed meeting with 99% certainty, and don’t see another cut likely until at least June. After that, the tool shows around a 50% chance of another cut before the end of the year.
  • Pimco’s Ivascyn, meanwhile, has told the FT that “we’re not out of the woods yet from an inflation perspective” and that it’s “certainly possible” we could see rate increases sooner than later. Part of his evidence? Recent surveys showing consumers are expecting inflation to increase again, which has been a leading indicator in the past.

Presidential POV: Never one to stick with the status quo, Trump is instead taking a big stick to interest rates. On Thursday, the president bucked both consensus expectations on rate cuts and seemingly threatened the Federal Reserve’s long-standing independence, saying he will “demand that interest rates drop immediately.” But why stop there? “Likewise, they should be dropping all over the world,” he added. “Interest rates should follow us all over.”