Traders are actively assessing the likelihood of Federal Reserve interest rate cuts for the year. While the Fed will likely remain idle this month, more long-term forecasts indicate a 25% chance of two rate cuts, 13% for one cut, and 22% for three cuts in 2025. With economic uncertainty on the rise — driven by cooling labor markets and persistently high borrowing costs — traders and analysts are debating whether the Federal Reserve will be forced to ease monetary policy in response.
Job market jitters
The latest employment report showed that the U.S. economy added 151,000 jobs in February, slightly below the expected 175,000, marking a slowdown from previous months. The unemployment rate inched up to 4.1% from 4% in January, signaling that the labor market may be softening under the weight of high interest rates.
Sectors such as healthcare and transportation saw moderate employment gains, but government payrolls declined, with federal employment shedding 10,000 jobs. More notably, several major corporations and government agencies have announced significant layoffs. ABC News, for instance, is undergoing restructuring, leading to roughly 200 job cuts, according to an internal memo reported by The New York Post. Meanwhile, the Department of Veterans Affairs plans to reduce its workforce by over 80,000 employees as part of an effort to revert to pre-pandemic staffing levels, per a memo obtained by Reuters.
In a recent speech, Powell emphasized that if the labor market were to weaken unexpectedly, the Federal Reserve is prepared to adjust its policy accordingly. He stated, “If the labor market were to weaken unexpectedly or inflation were to fall more quickly than anticipated, we can ease policy accordingly.”
Inflation report provides some relief
The Consumer Price Index (CPI) report, released on Wednesday, showed only a 2.8% inflation rate, which is less than expected and provides helpful information going forward. Some market participants believe that a weaker CPI print — indicating easing inflation — would increase the likelihood of two or more rate cuts. Others warned that any unexpected spike in inflation, particularly in housing or energy costs, could push back market expectations for monetary easing.
Fed forecasts
Prediction market traders on platforms like Kalshi and Polymarket are closely monitoring all of these developments. The current probabilities for Federal Reserve rate cuts in 2025 are as follows, according to Kalshi:
- One Cut: 13%
- Two Cuts: 25%
- Three Cuts: 22%
The leading prediction — two rate cuts — suggests that market participants expect a moderate easing cycle, with the Fed cutting rates but not moving aggressively toward an ultra-loose monetary policy. The relatively low probability assigned to a single cut suggests that traders see the Fed as likely to either cut rates more than once or hold steady.
The case for two rate cuts
The argument for two rate cuts is based on the combination of rising unemployment and economic uncertainty. If the CPI report indicates slowing inflation, the Fed could feel justified in easing monetary policy to prevent further labor market deterioration.
“We are starting to see some cracks in the labor market, but the Federal Reserve is in no rush to act,” said Federal Reserve Chair Jerome Powell in a recent speech at the University of Chicago. “Given the strength of the economy and progress on inflation, we have time to let the data guide us.” Powell emphasized that the central bank remains cautious and will wait for clearer economic signals before making policy adjustments, noting that the costs of being patient are relatively low.
This perspective suggests that while some traders anticipate rate cuts in response to rising unemployment, the Fed may prefer a measured approach. If labor market conditions deteriorate significantly, policymakers could move to ease monetary policy, but only if inflation remains under control. Powell’s remarks align with market expectations that while rate cuts are likely later in the year, the Fed is not yet ready to pivot aggressively.
Why one or three cuts are still on the table
The probabilities for one or three cuts reflect the economic uncertainty surrounding the Fed’s path. A single cut could materialize if inflation remains stubbornly high but the Fed still wants to signal a shift toward a looser stance.
On the other hand, if layoffs accelerate and economic data deteriorates significantly, the Fed may be forced into a more aggressive easing cycle, leading to three or more cuts.
“Markets are still pricing in the possibility of a recession, but Federal Reserve officials remain cautious,” said Federal Reserve Governor Christopher Waller in a recent interview with The Wall Street Journal. “If economic data were to deteriorate rapidly, the Federal Reserve stands ready to adjust its policy stance to support the economy, including considering more aggressive rate cuts if necessary.”
Waller’s comments reflect the Fed’s balancing act between maintaining price stability and responding to potential economic weakness. While traders anticipate rate cuts later in the year, Fed officials have signaled that they are not in a rush to move unless key indicators — such as employment and inflation — deteriorate significantly. If economic conditions worsen faster than expected, the central bank may shift from a gradual approach to a more aggressive easing cycle to prevent a sharp downturn.
