Interest rate forecast: What are the expectations for a reduction by the end of the year?

Fed Faces Tough Balancing Act Amid Slowing Growth and Tariff Pressures

Fed policymakers are unlikely to react strongly to the Q1 GDP contraction just yet, but by June, signs of economic cooling may prompt the central bank to begin cutting interest rates. Market participants are already pricing in a full percentage point of rate cuts by year-end.

U.S. GDP contracted by 0.3% on an annualized basis in Q1, largely due to a surge in imports ahead of Trump’s tariff hike, while consumer spending slowed significantly — down from 4.0% in Q4 2024 to just 1.8% in Q1 2025. Economists warn this points to a broader deceleration, which could lead to economic stagnation or even a recession if tariffs are raised further in July.

While the Federal Funds Rate remains at 4.25–4.5%, expectations are building for four 25-basis-point cuts starting in June. However, the Fed faces a policy dilemma: tariffs are driving up prices (inflationary) while also weakening labor demand and overall activity (disinflationary). This dual challenge limits the central bank’s ability to respond decisively in either direction.