The Federal Reserve's recent stance on rate cuts for 2025 appears disconnected from economic realities. Their projection of just two rate cuts contradicts market expectations of 4-6 cuts. This messaging strategy feels like a tactical move rather than a genuine forecast, particularly given the Fed's track record with projections. Their dot plot predictions have proven inaccurate 60% of the time.

The Fed's insistence on prioritizing their 2% inflation target seems misaligned with current data. Core PCE readings are showing significant improvement, with year-over-year numbers already displaying a "2 handle." The obsession with hitting exactly 2% inflation might be masking other pressing economic concerns.

Signals Labor Market Weakness

A wave of store closures is sweeping across the retail sector, painting a concerning picture for employment. Major retailers including Party City (850 stores), CVS (900 stores), and Walgreens (1,200 stores) are shuttering locations. Macy's plans to close 65 department stores, each representing significant job losses. Family Dollar's 700 store closures and Big Lots' 580 locations add to the growing list.

These closures represent thousands of jobs at risk, contradicting the Fed's optimistic employment outlook. The situation becomes more concerning when considering that 14 of 19 Fed members don't expect unemployment to exceed 4.3%. Current trends suggest this threshold could be breached as early as Q1 2025.

Hidden Signs of Economic Stress

The job market shows concerning signals beyond headline numbers. The median duration of unemployment has reached its highest level since 2021, with job seekers now taking approximately 11 weeks to secure new positions. This represents a 21% increase in just seven months. Continuing unemployment claims have approached 2 million people, matching levels not seen since the pandemic era.

These metrics suggest a labor market under stress, contrasting sharply with the Fed's portrayal of economic resilience. The combination of extended job search times and rising continuing claims typically precedes broader economic challenges.

The QE Question

The Federal Reserve might need to revive quantitative easing (QE) in 2025 alongside rate cuts. The absence of the Fed as a major buyer in the treasury and mortgage-backed securities markets has contributed to elevated rates. A return to QE could help stabilize these markets and support the housing sector, which remains critical to economic health.

Bottom Line

The Federal Reserve's projection of two rate cuts in 2025 appears overly conservative given current economic indicators. A combination of retail sector upheaval, lengthening unemployment duration, and persistent market stress points toward a need for more aggressive monetary easing. The likelihood of seeing six or more rate cuts in 2025 remains high, potentially accompanied by a return to quantitative easing. The Fed's current messaging might represent a strategic pause rather than a genuine forecast of their future actions.