What’s in store for Fed policy in 2025?

• Markets anticipate the Federal Reserve to keep rates steady through the next few FOMC meetings, with potential 25 basis point rate cuts resuming thereafter.¹
• Fed policy for the rest of 2025 will depend on economic data. Key metrics to watch include inflation and the labor market.
• Given the expected path of Fed policy, we see opportunities for investors in the very front end of the curve, managing interest rate risk with bond laddering and seeking higher income outside of core bonds.

After cutting the federal funds rate by 100 basis points in 2024, the Fed decided to maintain rates between the 4.25%-4.5% range at their January meeting, citing strength in the labor market and inflation remaining above target.²

So, what may be in store for Fed policy for the rest of 2025? And how can advisors leverage bond ETFs to position client portfolios for this environment? Read on to find out.

Figure 1: Federal funds rate: A brief history

A helpful guide to gauge future interest rate expectations is the 30-day Fed Fund futures prices. These prices measure the market's expectations for future fed funds rate adjustments by the Fed. As of February 14, 2025, the market expects the Fed to keep rates steady for most of the first half of 2025, with potential for a 25-basis point cut at the June meeting, bringing the fed funds rate to a range of 4% to 4.25%. As highlighted in the chart below, this is a material change from the expectations in September of 2024, where the market was projecting steeper rate cuts:

Figure 2: Projected fed funds rate

Looking out into the rest of 2025, we believe the most likely path is for the Fed to hold rates steady at its next few meetings while assessing incoming inflation and employment data. 

Why is that our base case? As of December 2024, the U.S. Core Personal Consumption Expenditures (PCE) Price Index was up 2.8% on an annualized basis.³ While that’s slightly down from a year prior, it’s still above the Fed’s stated 2% target.

“Inflation has moved much closer to our 2 percent longer-run goal, though it remains somewhat elevated,” Federal Reserve Chairman Jay Powell said in a press conference following the FOMC’s January 29^th meeting. “With our policy stance significantly less restrictive than it had been and the economy remaining strong, we do not need to be in a hurry to adjust our policy stance.”⁴

The BlackRock Investment Institute, meanwhile, foresees “persistent inflation pressures fueled by rising geopolitical fragmentation, plus big spending on the AI buildout and the low-carbon transition.” (Read more in BII’s 2025 Investment Outlook)

Combined with America’s rising debt and deficits, that macroeconomic backdrop suggests long-term Treasury yields will likely remain ‘higher for longer’ as investors demand higher compensation for risk.

How far and fast the Fed will cut in 2025 — and if they move rates at all — will be dependent on economic data, barring exogenous shocks like the COVID-19 pandemic. Fed Chairman Powell has repeatedly stressed the Fed is “data dependent” in its decision-making, with a stated long-term inflation target of 2%.⁵

Our outlook for Fed policy is based on expectations for the U.S. economy to slow slightly but remain in expansion — combined with our understanding of the Fed’s dual mandate.

2025 FOMC meeting schedule⁶

Regardless of the path of Fed policy in 2025, the iShares bond ETF platform offers investment tools for every scenario, whether the goal is to manage interest rate risk or seek higher income. Here are some ways advisors can use bond ETFs to position client portfolios today:

• Put cash to work: If overnight interest rates stay higher for longer, investors could consider allocating to short duration exposures with NEAR or targeting specific points on the yield curve with iBonds ETFs.
• Build bond ladders: Bond ladders hold an equal weight of bonds that mature in consecutive calendar years and can allow investors to better manage interest rate risk. iBonds ETFs offer advisors an efficient and scalable way to build and manage bond ladders across numerous client portfolios.
• Seek higher income: Potentially boost fixed income returns with higher yielding bonds. BINC, the iShares Flexible Income Active ETF, seeks to maximize income by investing across multiple “plus” fixed income sectors, such as high yield bonds and collateralized loan obligations (CLOs).