The U.S. Federal Reserve is widely anticipated to implement a 25 basis point interest rate cut on December 18th, according to a recent Reuters poll of economists. Ninety percent of respondents predict this reduction, with the majority forecasting a subsequent pause in late January due to growing concerns about potential inflationary risks.
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President-elect Donald Trump’s proposed economic policies, encompassing import tariffs and tax cuts, are expected to contribute to inflationary pressures. Trump is anticipated to swiftly pursue his agenda following his inauguration on January 20th.
Cooling Job Market Supports Rate Cut, but Inflation Looms
Recent data indicating a continued cooling trend in the U.S. job market, while maintaining relative resilience, reinforces the expectation that the Fed has room for another rate cut before assessing the impact of government policy early next year. This data supports the view that the economy can withstand a further reduction in rates without significant negative consequences.
“With the jobs report showing more slack despite solid income and job gains, we reiterate our call for another 25bp Fed cut in December,” commented Jonathan Millar, senior U.S. economist at Barclays.
Following the release of the jobs data, an overwhelming majority (93 of 103) economists polled projected a 25 basis point reduction at the December 17-18 Federal Open Market Committee (FOMC) meeting. This would lower the federal funds rate to a target range of 4.25%-4.50%. A minority (10 respondents) anticipated no change in rates. Current interest rate futures align with this prediction, with a quarter-point cut almost fully priced in.
However, a significant majority of economists (58 of 99) foresee the Fed holding rates steady at its January 28-29 meeting. This pause would occur shortly after President-elect Trump’s inauguration. The Fed has already implemented a cumulative 75 basis points in rate cuts since September.
Uncertainty Surrounds Fed’s Path Beyond January
Looking beyond January, there is a lack of consensus among economists regarding the Fed’s future course of action. The central bank’s decisions will likely hinge on the evolving economic landscape and the actual implementation of government policies.
“They (the Fed) are going to wait to see what happens next year, what is actually implemented versus what is kind of presented as a risk,” remarked Stephen Juneau, a U.S. economist at Bank of America.
The Fed’s current objective is to guide the federal funds rate toward a neutral level, neither stimulating nor restricting economic growth. The most recent estimate of the neutral rate is around 2.9%.
Fed Chair Jerome Powell recently indicated that policymakers “can afford to be a little more cautious as we try to find neutral,” citing the economy’s strength and inflation exceeding the central bank’s September forecasts.
Inflation Concerns Temper Expectations for Future Rate Cuts
Nearly 60% of economists (56 of 97) polled predict at least three more 25 basis point rate cuts by the end of next year, bringing the federal funds rate to 3.50%-3.75% or lower. This represents a significant decline in expectations compared to previous months, with over 90% forecasting such cuts in October and over 70% in November. Growing concerns about inflation appear to be tempering expectations for aggressive easing.
“Next year, the emerging disagreements about the degree of restrictiveness of monetary policy, or correspondingly about the estimates of the neutral policy rate, will likely become more contentious,” Millar of Barclays observed.
“Meanwhile, increased tariffs on imports are likely to keep core inflation elevated in 2025. In that context, we think it will be difficult for the (Fed) to cut rates more than twice next year.”
Economic Growth and Inflation Outlook
The U.S. economy, which expanded at an annualized rate of 2.8% in the last quarter, is projected to grow by 2.1% next year and 2% in 2026, according to median poll estimates. This growth surpasses the Fed’s current estimate of the non-inflationary growth rate of 1.8% in the coming years.
The inflation outlook for 2025 has been generally revised upward from the previous month. A significant majority of economists (36 of 48) believe there is a high risk of a resurgence in inflation next year, while the remaining respondents perceive the risk as low.
“In the medium term, higher tariffs and potential supply chain disruptions due to aggressive trade policy under the incoming Trump administration will likely drive core inflation significantly above 3% in mid-2025,” noted David Seif, chief economist for developed markets at Nomura.
The Federal Reserve will release its updated quarterly economic forecasts at the December FOMC meeting.
