Recent developments in U.S. markets point to growing expectations of interest rate cuts in 2025, driven by several factors most notably the possibility that President Donald Trump may name a successor to Federal Reserve Chair Jerome Powell in the coming months. This prospect has strengthened investor belief that the central bank may soon shift toward a more accommodative monetary policy.
On Friday, U.S. stock markets rose, with both the S&P 500 and Nasdaq Composite reaching record-high closes. This was partly due to increasing confidence in the likelihood of three or even four quarter-point rate cuts by December. According to the CME FedWatch Tool, the probability of such cuts has climbed to 56.1%, up from just 30.8% a week ago.
A major catalyst behind these expectations is speculation that Trump may appoint a new Fed chair by September or October as months ahead of Powell’s term expiration in May. Any potential successor is expected to favor rate cuts and could act as a "shadow" Fed chair in the interim.
Markets are also reacting to improving economic indicators, such as easing inflation, better trade dynamics, and declining geopolitical tensions in the Middle East and Ukraine. In his congressional testimony earlier this week, Powell acknowledged that recent economic data might have justified rate cuts were it not for the potential inflationary impact of tariffs as an effect that has yet to materialize meaningfully in current inflation metrics.
Supporting the market sentiment were comments from Federal Reserve officials. Governor Christopher Waller recently became the first policymaker to advocate for a rate cut as early as July. This was echoed by Michelle Bowman, who said in a speech in Prague that she is open to lowering rates as soon as next month.
All three major U.S. stock indexes posted gains by the end of the week:
- Dow Jones: +1.00%
- S&P 500: +0.52% (closing at 6,173.07)
- Nasdaq Composite: +0.52% (closing at 20,273.46)
In the bond market, the 2-year Treasury yield dropped to 3.741%, a weekly decline of 16.6 basis points and the largest since April. The 10-year yield also fell, ending the week at 4.283%.
Overall, these movements reflect increasing market belief that inflation could ease without overly tight monetary policy and that a "soft landing" for the U.S. economy a slowdown without a recession is now more likely than before.
