US Interest Rate Forecast for the Next 5 Years: Analyst Views

The Federal Reserve has started trimming US interest rates now that inflation is finally heading towards its 2% objective.

The federal fund’s target rate now stands at 4.50% to 4.75% after a 25 basis points (bp) reduction followed September’s 50 bp cut in early November.

However, are US interest rates expected to go down again, or will inflationary concerns surrounding President-elect Donald Trump’s policies derail plans?

In our US interest rate forecast, we examine the reasons behind the recent cuts and ask financial observers where they believe rates will be over the next five years.

Table of Contents Table of Contents

1. Key Takeaways
2. Who Decides US Interest Rates?
3. What Has Happened to US Interest Rates Lately?
4. What Will Influence US Interest Rates?
5. Projected Interest Rates in 5 Years: Analyst Views
6. US Interest Rate History
7. The Bottom Line: Will US Interest Rates Go Down in 2025?
8. FAQs
9. References

Show Full Guide

Table of Contents

1. Key Takeaways
2. Who Decides US Interest Rates?
3. What Has Happened to US Interest Rates Lately?
Show Full Guide
4. What Will Influence US Interest Rates?
5. Projected Interest Rates in 5 Years: Analyst Views
6. US Interest Rate History
7. The Bottom Line: Will US Interest Rates Go Down in 2025?
8. FAQs
9. References

Who Decides US Interest Rates?

The federal funds rate is the interest rate charged by banks to borrow from each other overnight. It’s arguably the most influential rate in the US.

It’s the job of the Federal Open Market Committee (FOMC) to set a target range for the federal funds rate at each of its eight regularly scheduled meetings per year.

The FOMC is made up of members of the Board of Governors, who are based in Washington, DC, and Federal Reserve Bank presidents from around the country.

According to the Fed, interest rates influence the “borrowing costs and spending decisions” of households and businesses. It stated: “Lower interest rates, for example, often encourage more people to obtain a mortgage for a home or to borrow money for an automobile or home improvements.”

In addition, businesses can be persuaded to borrow funds to expand, such as to purchase new equipment, update plants, or hire more workers.

“Conversely, higher interest rates can restrain such borrowing by consumers and businesses, which can prevent excesses from building in the economy,” it added.

What Has Happened to US Interest Rates Lately?

The easing of inflation, which policymakers believe is on its way back to the 2% target, has prompted interest rates to be cut twice so far in 2024.

The first 50 bp reduction occurred in September 2024, bringing the target level down to 5.25%- 5.5%.

Two months later, in early November, a further 25 bp reduction was announced, bringing the level down even further to 4.5%-4.75%.

The Most Recent Interest Rate Decision

In early November 2024, the US Federal Reserve announced that the rate would be reduced by 25 bp to 4.5%-4.75%.

The US Fed’s interest rate forecast noted that recent indicators suggested economic activity has continued to expand at a solid pace.

It stated: “Since earlier in the year, labor market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made progress toward the Committee’s 2% objective but remains somewhat elevated.”

At a subsequent press conference, Fed chairman Jerome Powell insisted the focus was on achieving the dual-mandate goals of maximum employment and stable prices.

“The economy is strong overall and has made significant progress towards our goals over the past two years,” he said. “The labor market has cooled from its formerly overheated state and remains solid.”

He also pointed out that the previously sharply rising cost of living was now under control.

“Inflation has eased substantially from a peak of 7% to 2.1% as of September,” he explained. “We are committed to maintaining our economy’s strength by supporting maximum employment and returning inflation to our 2% goal.”

Of course, there is a looming question: will US interest rates go up?

However, Powell declined to be drawn on the direction in which he believed interest rates would travel next year when asked if he could rule out a hike in 2025.

“I wouldn’t rule anything out or in that far away,” he said. “But that’s certainly not our plan. Our baseline expectation is that we’ll continue to move gradually down towards neutral, that the economy will continue to grow at a healthy clip, and that the labor market will remain strong.”

What Will Influence US Interest Rates?

The US interest rate outlook depends on several economic factors that are likely to influence the Fed’s decisions over the coming year.

According to the recently released minutes from the FOMC meeting in early November, participants believed that inflation had eased substantially from its peak.

It stated: “Almost all participants judged that, though month-to-month movements would remain volatile, incoming data generally remained consistent with inflation returning sustainably to 2%.”

Those in the meeting also commented that disinflationary progress had been seen across a broad range of core goods and services prices.

“With regard to the outlook for inflation, participants indicated that they remained confident that inflation was moving sustainably toward 2%, although a couple noted the possibility that the process could take longer than previously expected.”

Projected Interest Rates in 5 Years: Analyst Views

So, what is the US interest rate forecast for the next 5 years? We have examined a range of views to gauge what observers believe is likely to happen.

JP Morgan Research expects the Fed to cut rates by another 25 bp in December, with further cuts only taking place once per quarter in 2025.

It expects the Fed to conclude its cutting cycle once the policy rate reaches 3.5% versus its earlier forecast for a 3% terminal rate.

Michael Feroli, JP Morgan’s chief US economist, said:

“Regardless of exactly what policies are introduced, a change in the party occupying the White House creates some new unknowns for the economy. This argues for a more gradual pace of interest rate cuts.”

According to Russ Mould, investment director at AJ Bell, projected US interest rates are now seen reaching 4% by Christmas 2025. He said:

​​”It could be down to sticky inflation, worries about government borrowing levels, or the absence of a long-awaited recession, but investors are starting to cut back on the number of interest rate cuts they are expecting from both the US Federal Reserve and the Bank of England.”

While the Fed is expected to cut by 25 bp on December 18, 2024, markets seem less convinced the Bank of England will act the following day.

“A month or two ago, markets were pricing in a Fed funds rate and a Bank of England base rate as low as 3.5% by next Christmas, but 4% now seems to be the current consensus for 12 months’ time,” he added.

Preston Caldwell, Morningstar’s chief US economist, expects inflation to run under consensus expectations over the next few years.

“This is owing to our view that the economy will be running a good deal below potential in 2025, and this slack should generate hefty disinflationary pressure,” he wrote in an update. “This should allow for more aggressive interest rate cuts than the market expects.”

Meanwhile, Fitch Ratings has predicted that the scale of US interest rate cuts in the current monetary policy easing cycle will be modest compared to the past.

In a forecast in late September, it stated:

“We now expect the federal funds target (upper) rate to fall to 4.5% by the end of this year, and to 3.5% by the end-2025, and then to a neutral level of 3.0% by June 2026.”

Finally, Vanguard has US interest rates around 4.5% by the end of this year and then falling to 4% as 2025 comes to a close.

When Will Interest Rates Go Down?

For those who believe the next move from the Fed will be a cut, when are interest rates going down?

The Fed will trim interest rates in December 2024 before making shallower cuts in 2025 than had been expected, according to a Reuters poll of economists.

The change of heart surrounding their US interest rate expectations is due to the risk of higher inflation from President-elect Trump’s proposed policies.

Ben Yearsley, director at Fairview Investing, predicts there will be cuts in US interest rates but isn’t expecting anything too dramatic.

He told Techopedia:

“With growth strong in the US and less of a focus for the Fed on inflation, there is less of a pressing need to cut rates. I think they will wait and see what President Trump actually does before doing too much. Having said that, there could still be a small cut in December, but it feels less likely now than a few months back.”

Rob Clarry, investment strategist at Evelyn Partners, expects the Fed to continue cutting rates into 2025, although there is always the looming Donald Trump factor.

He told Techopedia:

“It depends on which of his policies are implemented and at what pace, but large-scale deportations and tariffs are inflationary as they would lead to labor shortages and higher costs on imported goods, respectively. This would limit the ability of the Fed to cut rates.”

Clarry pointed out that we were “clearly in a higher rate environment” compared to the previous decade.

“Looking beyond the next twelve months, demand for capital for energy investment, defense spending, and artificial intelligence should lift rates,” he added.

George Brown, senior US economist at Schroders, believes Trump is well-positioned to cut taxes and regulations while raising tariffs and restricting immigration.

“Inflation should also prove stickier, reinforcing our conviction that the Federal Reserve (Fed) will not deliver as much easing as it has indicated it will,” he said. “Given our view that the neutral rate lies around 3.50%, Trump’s return to the White House likely means that the Fed needs to keep rates above this level.”

According to Dan Coatsworth, investment analyst at AJ Bell, shares have rallied since October 2023 in the belief that inflationary pressures were easing and interest rates would fall.

However, he believes that Trump’s return to the White House could put things on a rather different path.

“While we could still see rate cuts in the near term, the Federal Reserve may not cut as hard and fast as previously thought if inflation strengthens once Trump gets back into power,” he said. “That’s a major tailwind for equity markets and certainly not a backdrop that would normally support the kind of share price gains we saw after 2024’s election result.”

Jonathan Moyes, head of investment research at Wealth Club, believes the future of US interest rates could depend on the backdrop created by Trump’s victory.

“All eyes will be on Donald Trump and any major changes to tax and spending plans once the new administration has been formed,” he said. “Go too far too soon with any tax cuts, and the Fed may be forced to hike rates to cool any additional inflationary pressures, potentially setting the stage for a conflict between the new administration and the Fed in 2025.”

US Interest Rate History

The federal funds target rate was low during the Covid-ravaged years from 2020 to 2022. In fact, it was just 0-0.25% as the virus started to spread around the world.

However, it then started to increase as inflation rose and stood at 5.25%-5.5% during the summer of 2023.

This target rate was maintained until the 50 bp cut in September 2024, which brought it down to 4.75%-5%. A further 25 bp cut in November took it to 4.50%- 4.75%.

The Bottom Line: Will US Interest Rates Go Down in 2025?

If inflation keeps going down, there’s a good chance of further interest rate cuts in 2025.

Surveys suggest that the US interest rate predictions of some analysts are for a final cut in 2024 and then more over the coming year.

However, the economic wildcard is President-elect Donald Trump and whether he will pursue inflationary policies when he finally returns to the White House.

This makes it particularly difficult to answer the question of where US interest rates will be in 5 years. There are simply too many unknowns at this stage.

While economists’ consensus view is that we’ll see cuts next year, the scale of them may not be as dramatic as previously thought.

FAQs