There's now a 40% chance the Fed will pivot back to hiking rates again next year

Wall Street recently reacted sharply to signs that the Federal Reserve may implement fewer rate cuts than anticipated in 2025. However, Apollo Global Management’s chief economist, Torsten Sløk, has cautioned that an interest rate hike is also a possibility.

“The strong economy, combined with potential policies like lower taxes, higher tariffs, and immigration restrictions, has increased the likelihood that the Fed could hike rates in 2025,” Sløk wrote in a note on Thursday. “We estimate a 40% probability that the Fed will raise interest rates in 2025.”

Economic growth remains robust, underscored by a Commerce Department revision that boosted third-quarter GDP growth to 3.1%, up from the prior 2.8% estimate and slightly above the 3% growth rate in the second quarter.

Forecasts for the fourth quarter suggest continued strength, with the Atlanta Fed’s GDPNow model projecting 3.1% growth. This pace significantly exceeds the Congressional Budget Office’s long-term growth estimate of 2%, Sløk pointed out.

At the same time, President-elect Donald Trump’s proposed policies—including tax cuts, higher tariffs, and stricter immigration measures—could add to inflationary pressures.

With inflation persistently above the Fed’s 2% target, such policies might leave central bankers little room to lower rates further. This year, the Fed cut rates by 100 basis points, bringing them to a range of 4.25%-4.50%.

In their latest economic projections, Fed officials adjusted inflation forecasts upward while leaving economic growth and unemployment estimates largely unchanged.

“For investors, this is starting to resemble 2022—elevated inflation, rising interest rates, and declining stock prices,” Sløk noted.

The parallels are concerning. In 2022, the S&P 500 dropped 19%, and the Nasdaq plunged 33%, marking the worst year for markets since the 2008 financial crisis.

Other market analysts also foresee a more cautious Fed stance. Ed Yardeni, a veteran economist, remarked in a note on Wednesday that the chances of seeing only one or even no rate cuts in 2025 have grown.

This uncertainty is tied to the so-called neutral rate—the interest rate level that neither accelerates nor slows economic growth. Analysts are debating whether the economy can now tolerate tighter monetary policy than in the past.