US Fed Funds Rate — To cut or not?

Original Published Date on Medium: June 30th, 2025

Reference: https://medium.com/@virikajuneja/us-fed-funds-rate-to-cut-or-not-064bfce0bbc4

Fed Funds is the interest rate that banks charge each other to borrow or lend reserves overnight. The rate currently stands at 4.25%. It has remained unchanged since Dec 2024. It is a vital policy tool used by the Fed to manage monetary policy. The Fed (US Central Bank) has to make a decision whether to cut the rate or not.

The case for cutting Fed Funds Rate

The inflation in the US has been declining since the beginning for the year, mainly owing to a lower consumer spending and US Tariffs. The annual inflation in May 2024 is 2.4%. Lower consumer spending may also lead to lower hiring. University of Michigan’s Consumer Sentiment Index has remained 18%. In December 2024, it was a 74%. Personal Income has also declined 0.4% as some Social Security benefits have expired. In addition, the positive impact of US Tariffs is also yet to be seen.

If the above soft inflation and consumer spending scenario continues, the Fed may be encouraged to cut Fed Funds Rate, which could also boost bank lending with lower interest rates and encourage consumer spending. Although the Fed has planned a couple of 25 bps rate cuts in 2025, the real impact of tariffs on inflation and economy needs to be further evaluated. Some analysts such as EY, also forecast a lower GDP Growth Rate from 2.8% in 2024 to 1.5% in 2025. The above factors may prompt the Fed to cut policy (Fed Funds) rate.

The case for not cutting Fed Funds Rate

Despite the recent decrease in inflation, the Fed has also increased its inflation outlook to over 3% for this year owing to tariff related volatility. New York Fed’s and University of Michigan’s inflation expectation surveys have placed inflations levels between 3.3% to 5.1%.

As the tariffs get firmed up in coming months, there may be an upward impact on prices owing to potential supply shortages. Any major escalations in the Middle-East conflict can increase oil prices, which could prevent the Fed to ease policy rates.

Markets have estimated a low chance for the rate to be cut in the upcoming 12 member FOMC (Federal Open Markets Committee) in July given the US economy relatively strong fundamentals such a unemployment rate (4.2%), inflation outlook (3–4%) and steady prices. Thus, the Fed may adopt a “wait-and-watch” scenario.