The United States Federal Reserve (Fed) is expected to cut interest rates next month, but the reduction in 2025 may be slower than expected last month. This follows higher inflation risks than President Donald Trump's proposed policies, according to most economists in a Reuters poll.
The prospect of rising prices, a result of Trump's planned policies such as higher tariffs and tax cuts, led the market to nearly halve expectations of a rate cut to around 75 basis points by the end of 2025.
Continued economic strength, stubborn inflation, and a stock market nearing new records are obstacles to a hasty rate cut. Fed Chairman Jerome Powell said last week, "The economy is not signaling that we need to rush to lower rates."
Even so, nearly 90% of economists, 94 out of 106, in a November 12-20 Reuters poll expected a cut of 25 basis points in December, bringing the Fed funds rate to 4.25%-4.50%. Twelve respondents expected no change, compared to just three in last month's survey.
However, market prices indicate a probability of less than 60% for a reduction in December. Even a few doubt this movement.
"We still expect a reduction in December. We believe the data will support it. But it's understandable why markets are a bit volatile... the economy is still very strong, inflation is still above target,” said Stephen Juneau, US economist at Bank of America.
“We will see deregulation, easier fiscal policy, more protectionist trade policy, and a stricter immigration stance. All this creates the risk of increasing inflation. The Fed may not cut rates as much as previously considered because they will see inflation continue to be above target.”
Bank of America recently raised its Fed funds terminal rate forecast to 3.75%-4.00% from 3.00%-3.25%.
The inflation outlook for the next two years has also been raised from last month. The survey showed personal consumption expenditure (PCE) inflation – the Fed's preferred measure – is expected to remain above the Fed's 2% target until at least 2027.
A total of 85% of the majority of respondents, that is 57 out of 67, said the risk of inflation increasing next year is becoming more significant.
Most economists expect Trump's tariffs to be implemented early next year, which the majority, 44 out of 51, say will have a significant impact on the US economy.
Tariffs on imports from China are expected to shave up to 1 percentage point off China's economic growth next year, according to a separate Reuters poll.
The Fed is expected to cut as much as 25 basis points in the first three quarters, before keeping rates unchanged, according to the survey field. The Fed funds rate is expected to be at 3.50%-3.75% by the end of 2025, which is 50 basis points higher than last month's projection.
The US economy, which grew at an annual rate of 2.8% last quarter, is expected to grow 2.7% this year and 2% in 2025 and 2026, based on the survey. This figure is faster than the 1.8% non-inflationary growth rate that Fed officials forecast for the next few years.
