As the Federal Reserve prepares to update its interest rate outlook this week, a divergence is emerging between the U.S. central bank and Wall Street. While money managers are betting on just two more quarter-point rate cuts in 2025, the Fed may signal it has room for three, exceeding investors’ subdued expectations.
The Significance of the Fed’s Summary of Economic Projections
Four times a year, Fed policymakers release their Summary of Economic Projections (SEP), providing crucial insights into their outlook for economic growth, inflation, unemployment, and interest rates. While the SEP doesn’t guarantee the path of monetary policy, it offers a window into officials’ thinking.
Back in September, the Fed penciled in a year-end federal funds rate of 3.4% for 2025. But recent economic data suggests the central bank may not need to lower borrowing costs quite that far. Steady job gains and easing inflation pressures indicate the economy is normalizing without slipping into a deep recession.
Nonfarm Payrolls Signal Labor Market Stability
The U.S. labor market, a key focus for the Fed, is showing signs of settling back into a sustainable pace of growth. In November, the economy added 180,000 jobs, closely aligned with the pre-pandemic average from 2017 to 2019. This moderation suggests the job market is stabilizing after a period of outsized gains.
The labor data should give the Fed confidence that it’s on track to achieving its goal of maximum employment. Policymakers now have tangible evidence that job growth has steadied.
– According to a Wall Street economist
Inflation Metrics Point to Price Stability
On the inflation front, the Fed’s preferred price gauge, the Personal Consumption Expenditures (PCE) index, has also trended lower in recent months. While the headline rate stood at 2.3% year-over-year in October, the annualized pace over the last six months has slowed to just 1.6%, undershooting the central bank’s 2% target.
This forward-looking trajectory indicates the Fed’s aggressive rate hikes since early 2022 are working their way through the economy and successfully cooling demand. As a result, policymakers likely have the scope to ease up on the monetary brakes in the coming year.
Implications for Risk Assets and Cryptocurrencies
A more dovish interest rate path than Wall Street currently anticipates could provide a meaningful boost to risk assets, including cryptocurrencies like Bitcoin and Ethereum. Lower borrowing costs tend to drive money into higher-yielding investments as the appeal of holding cash or bonds diminishes.
For the burgeoning crypto market, the prospect of sustained Fed easing in 2025 could be particularly bullish. Digital assets have been highly sensitive to changes in monetary policy, with prices often rallying when the Fed signals a more accommodative stance.
A 25-basis-point downward adjustment in the Fed’s year-end 2025 rate projection—from September’s 3.4% forecast to a fresh estimate of 3.65%—could be enough to jumpstart a long-term uptrend in crypto. While seemingly modest, that 0.25 percentage point difference would exceed Wall Street’s current forecast and reaffirm the Fed’s commitment to supporting economic growth.
The Bottom Line
As the Fed prepares to update its rate outlook, investors should be attuned to the potential for a dovish surprise. An endorsement of 75 basis points of easing in 2025, rather than Wall Street’s assumed 50, could catalyze a powerful rally in risk assets, with cryptocurrencies poised to be among the prime beneficiaries.
Of course, the path of monetary policy is never set in stone. The Fed will remain data-dependent, adjusting its stance as needed to navigate an uncertain economic landscape. But for now, the stars appear to be aligning for a steady, extended period of lower rates—a boon for those betting on the long-term promise of digital assets.
