Analysis of the Federal Reserve's 2025 Interest Rate Path Expectations and Asset Allocation Strategies

According to the CME “FedWatch” data provided, the market expects the Federal Reserve to most likely keep interest rates unchanged in January 2025 (82.3%), while the probability of a cumulative 25 basis point rate cut by March is close to 50% (45.6%). The following is a comprehensive analysis of the expected evolution of the interest rate path and corresponding asset allocation strategies based on the latest information.

• Short-term (January 2025)
  ：The probability of keeping interest rates unchanged dominates, reflecting a policy wait-and-see sentiment [1].
• Mid-term (March 2025)
  ：The probability of a cumulative 25 basis point rate cut rises (45.6%), while the probability of keeping rates unchanged still stands at 46.7%, indicating significant uncertainty in the policy path [1].
• Annual Tone
  ：The market expects the pace of rate cuts to be more cautious than earlier, avoiding aggressive easing [2].

• Year-to-date
  ：From more aggressive rate cut expectations at the start of the year to the current more gradual path. Earlier this year, many analysts expected multiple rate cuts in 2025, but end-of-year observations show that the magnitude of policy adjustments has narrowed, with more “stop-and-go” fine-tuning [1].
• Core Influencing Factors
  ：
  • Inflation level and stickiness: Although inflation has cooled, it remains above the target, so policy needs to remain cautious.
  • Employment market: The labor market is resilient, giving the Federal Reserve more patience.
  • Geopolitical and fiscal policies: Increased uncertainty exacerbates policy games.

• Rate cut scenario
  ：If economic data continues to slow, the Federal Reserve may start a gradual rate cut of 25-50 basis points in March or subsequent meetings [1].
• Status quo scenario
  ：If inflation rebounds or employment is stronger than expected, the Federal Reserve may keep interest rates unchanged for a longer period [2].
• Rate hike risk scenario
  ：Under certain conditions (e.g., significant rebound in inflation), the possibility of another rate hike cannot be ruled out (though the current probability is low) [1].

• Bonds
  ：Long-duration bond yields tend to decline, and prices may rise. It is recommended to increase holdings of long-duration Treasury bonds or high-quality corporate bonds to lock in higher coupon rates [2].
• Stocks
  ：
  • Beneficiary sectors
    ：Technology, growth stocks, real estate (interest rate-sensitive sectors), and finance (benefiting from improved asset quality).
  • Defensive sectors
    ：Utilities and consumer staples may perform steadily.
• Allocation advice
  ：Moderately increase the weight of long-duration bonds and growth stocks, while retaining certain defensive assets to balance volatility.

• Bonds
  ：Yields remain high; short-duration bonds are more attractive, as they can lock in higher coupon rates and reduce interest rate risk [2].
• Stocks
  ：
  • Beneficiary sectors
    ：Financial stocks such as banks and insurance (benefiting from interest spreads); cyclical industries like energy and materials.
  • Cautious sectors
    ：High-leverage growth stocks may come under pressure.
• Allocation advice
  ：Focus on short-duration bonds, high-dividend value stocks, and defensive sectors; reduce allocations to long-duration bonds and high-risk growth stocks.

• Bonds
  ：Short-duration bonds and floating-rate bonds perform better, while long-duration bond prices are under pressure.
• Stocks
  ：Cyclical sectors such as finance and energy may benefit, while overall market valuations are suppressed.
• Allocation advice
  ：Increase allocations to short-duration and floating-rate assets, reduce the weight of long-duration bonds, and pay attention to the allocation value of cash and cash equivalents.

• Bonds
  ：Adjust duration portfolios based on interest rate expectations. Increase holdings of long-duration assets when rate cuts are expected; focus on short-duration or floating-rate products when rates are expected to be stable or rising [2].
• Stocks
  ：Pay attention to interest rate sensitivity and earnings quality. Growth stocks are relatively dominant in a rate-cutting context, while value stocks are more defensive in a high-interest rate environment.
• Diversification
  ：Moderately allocate traditional safe-haven assets such as real estate investment trusts (REITs) and gold, as well as defensive industries, to reduce portfolio volatility.
• Dynamic adjustment
  ：Regularly evaluate macroeconomic data (inflation, employment, GDP) and policy signals, and flexibly adjust portfolio structure to adapt to the evolution of the interest rate path.

[0] Jinling API Data
[1] Yahoo Finance - Federal Reserve cuts interest rates by 0.25%, Powell … (https://finance.yahoo.com/news/live/live-coverage-federal-reserve-cuts-interest-rates-by-025-powell-warns-theres-no-risk-free-path-134139574.html)
[2] Yahoo Finance - What the Fed’s lower rates mean for bond investors (https://finance.yahoo.com/news/lower-rates-fed-impact-bond-190500444.html)
[3] Bloomberg - Major central banks deliver biggest easing push in over a … (https://ca.finance.yahoo.com/news/major-central-banks-deliver-biggest-102350470.html)
[4] Forbes - How 2025 Rate Cuts Reshape Banks, Fintech and Borrowing (https://www.forbes.com/sites/pamkaur/2025/12/04/what-the-feds-2025-rate-cuts-mean-for-banks-and-fintech/)