What is the outlook for the Fed's third rate cut this year?

The focus of the global financial market in 2025 has always been on the fluctuations of the Fed's interest rate policy. After two consecutive rate cuts in September and October, the possibility of a third rate cut by the Fed this year has become the core topic of market discussion. From the perspective of economic fundamentals, policy logic and potential risks, a third rate cut this year has certain rationality, but it faces multiple constraints. Ultimately, it is likely to be a "cautious rate cut", and the actual boost to the economy should be viewed rationally.

The contradictory signals from the economic fundamentals constitute the core background for a third rate cut. The core logic supporting a rate cut lies in the continuous weakness of the job market and the accumulation of economic downturn risks. The Fed's September interest rate statement adjusted its assessment of the job market from "good" to "job growth has slowed and the unemployment rate has risen slightly". The latest data shows that the US unemployment rate has risen to 4.2%, the growth rate of non-farm payrolls has been below expectations for three consecutive months, and the employment sub-index of the manufacturing PMI has remained below the boom-bust line, indicating a clear cooling trend in the labor market.

However, the stickiness of inflation has set a clear red line for the rate cut decision. Currently, the core PCE inflation rate in the US remains at 3.1%, above the long-term target of 2%, and sticky components such as service inflation and housing inflation are declining slowly. The Fed's October interest rate statement added the phrase "inflation is rising", indicating its vigilance against inflation rebound.

The Fed's policy logic and internal differences further reduce the "aggressiveness" of a third rate cut. From the perspective of policy operation, the Fed currently follows the "data-dependent" principle and emphasizes that monetary policy has "no preset path", demonstrating the characteristics of fine-tuning. After the October rate cut, Fed Chair Powell sent a "hawkish" signal, clearly stating that a rate cut in December is not a certainty and that subsequent economic data and risk changes need to be evaluated. This statement reflects the Fed's restraint against excessive easing.

The policy divergence among global central banks and external risks also constrain a third rate cut. Currently, major central banks around the world have entered a "各自为战" stage： the Bank of Canada has completed four rate cuts and hinted at a pause， the European Central Bank has maintained interest rates unchanged for three consecutive times， and the Bank of Japan still adheres to a loose policy but has not followed suit with a rate cut. This differentiated pattern weakens the Fed's space for continuous rate cuts. If the Fed implements a third rate cut alone， it may lead to a further expansion of the US-EU interest rate differential， causing the US dollar to weaken excessively， pushing up import costs and global commodity prices， and instead intensifying the US's imported inflation pressure. At the same time， the uncertainty of geopolitical conflicts remains， and international oil prices fluctuate sharply due to supply shocks. If a rate cut is combined with rising oil prices， it may create a "rebound in inflation + weak growth" stagflation risk.

From the perspective of market impact and policy effect， even if a third rate cut is implemented this year， its boost to the economy may fall short of expectations. In the short term， a rate cut can lower borrowing costs for enterprises and mortgage rates for residents， stimulate the real estate market and investment by small and medium-sized enterprises， and at the same time drive funds into the stock and bond markets， creating a short-term "wealth effect" of rising asset prices. However， in the long term， the structural problems of the US economy cannot be solved through monetary policy： corporate leverage is already at a historical high， and low interest rates may exacerbate debt risks； the consumer market shows a differentiated trend， and the consumption capacity of middle and low-income groups affected by the cost-of-living crisis is difficult to recover quickly； the valuations of tech giants are at historical highs， and if the rate cut does not translate into actual profit growth， it may trigger a valuation correction in the stock market.

Overall， the outlook for a third rate cut by the Fed this year is not a certainty， but rather presents a "high probability of a small rate cut and a low probability of a pause" feature. For the global market, it is necessary to view the Fed's interest rate cut cycle rationally: this is not the start of a new round of easing, but rather a "preventive adjustment" to address short-term economic pressure. In the future, the Fed's interest rate policy will be more cautious, with "small steps, gradual progress, and data dependence" becoming the core features. The Fed's decision to cut interest rates for the third time this year not only concerns the short-term direction of the US economy but will also reshape the global monetary policy landscape and financial market ecology. Its subsequent impact deserves continuous attention.