There will be no interest rate cuts by the Federal Reserve this year

Forget about rate cuts this year. The Federal Reserve is not budging, no matter how much Wall Street begs for a break. Inflation is being stubborn, the labor market refuses to chill, and the government is racking up deficits like there’s no tomorrow.

According to Bank of America, there’s no chance the Fed will cut rates in 2025. “Inflation is stuck above target,” said economist Stephen Juneau. “Activity is strong, and the labor market now appears to have stabilized.”

This isn’t what anyone wanted to hear. Just a few months ago, Fed officials hinted at cutting rates by a full percentage point in 2025. By December, that was slashed in half.

Inflation reports and a labor market that won’t quit

This week, all eyes are on two Bureau of Labor Statistics reports. The producer price index (PPI) dropped on Tuesday, and it’s gonna be followed by the consumer price index (CPI) on Wednesday.

Both will show just how sticky inflation still is. There has been a 0.3% monthly increase in December for PPI, with the core number (excluding food and energy) rising the same amount. November’s annual PPI rate hit 3%, while core inflation hit 3.5%—the highest numbers since February 2023.

CPI isn’t looking much better. Forecasters expect a 0.3% bump in headline inflation and a 0.2% rise in core inflation for December. On a yearly basis, those numbers translate to 2.9% and 3.3%, respectively. The Federal Reserve wants inflation at 2%. These numbers scream, “Not happening.”

Meanwhile, the labor market continues to complicate things. December’s nonfarm payroll report showed 256,000 new jobs added, and the unemployment rate dropped to 4.1%. The Fed’s dual mandate of stable prices and full employment is colliding, making it almost impossible to justify cutting rates. Juneau even suggested the Fed might go in the opposite direction.

“The risks for the next move are skewed toward a hike,” he said. The Fed relies on the personal consumption expenditures (PCE) price index for its inflation forecasts, but both PPI and CPI feed into that data.

If core PCE inflation exceeds 3% or long-term inflation expectations become unanchored, rate hikes could be back on the table. For now, the central bank is expected to hold rates steady.

According to the CME Group’s FedWatch tool, there’s almost no chance of a rate change at the January 28–29 meeting. As for the rest of the year, traders are leaning toward no cuts at all.

Government deficits and ballooning debt

While the Federal Reserve wrestles with inflation and employment, the federal government is swimming in red ink. December’s deficit came in at $86.7 billion, which sounds like an improvement—until you look at the bigger picture.

The first quarter of the fiscal year saw a $710.9 billion shortfall, up a staggering 39.4% from the same period last year. Spending is up, tax revenue is down, and financing costs are through the roof.

The national debt has now crossed $36 trillion. Interest payments alone have hit $308.4 billion so far in fiscal 2025, up 7% from last year. By year’s end, those costs are expected to top $1.2 trillion, breaking the record set in 2024. The government spends more on interest than on anything else—except Social Security, defense, and health care.

Treasury yields aren’t helping. While short-term yields have stayed steady, long-term rates are climbing. The 10-year Treasury note recently hit 4.8%, up 0.4 percentage points in just a month. Rising yields make it more expensive for the government to borrow, adding to the already massive debt pile.

At the same time, government spending is soaring. Outlays for the first quarter were 11% higher than last year, while tax receipts fell by 2%. It’s a brutal combination that shows no signs of letting up. This fiscal chaos makes it even harder for the Fed to justify easing rates. Cutting rates could fuel inflation, which is the last thing anyone wants right now.

From Zero to Web3 Pro: Your 90-Day Career Launch Plan