How low will the Fed go?
Pace of cuts vs uncertain r*
The Federal Reserve delivered a measured 25-basis-point interest rate cut on 7 November, lowering the federal funds rate to 4.50–4.75 per cent. Yet fixed-income analysts are scrutinizing where the easing cycle will ultimately terminate. With the incoming administration promising tariffs, tax cuts, and deficit expansion, the terminal rate is drifting higher.
The Elusive Terminal Boundary
If fiscal stimulus and protectionism re-ignite inflation pressures in 2025, the neutral rate of interest (r*) will sit significantly higher than central bankers projected in their September dots. Fixed-income markets have begun pricing in an early halt to the easing cycle, projecting that the Fed may pause rate cuts once the policy rate approaches four per cent. The runway for monetary easing is rapidly narrowing.
The Federal Reserve’s rate-cutting campaign is heading toward an early collision with fiscal reality, as prospective tax cuts and tariffs force policymakers to raise their terminal rate floor.