Investor expectations of where the US policy rate is likely to be in December 2025 have moved around a lot this year. In January the expected rate started at 3.2%, before steadily rising on the back of unexpectedly high inflation and continued strong economic conditions. After peaking at 4.5% in April, it has steadily declined. As of August 9, it was back to 3.2% as recession fears unwound. The FOMC is widely expected to commence its rate-cutting cycle in September. However, the scale of its easing remains uncertain. Traditionally, the FOMC has cut aggressively, with easing cycles often coinciding with recession. If a recession were to occur, the FOMC would be likely to indulge in some drastic pruning: as a frame of reference, even the relatively mild 2001 US recession was accompanied by 475bps in cuts. And so while it makes sense for investors to plan for a period of higher interest rates than they were used to pre-COVID, a return to the zero lower bound is not out of the question. With an anticipated US slowing through the rest of the year, we expect heightened volatility in interest rate markets as investors try to parse whether the slowdown turns into something worse.
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