ICYMI – (nearly) 90% of economists expect the Federal Reserve to cut by 25bp in December

Reuters published its Fed survey overnight. In summary from the report:

• December Rate Cut Likely:

  • Nearly 90% of economists (94 out of 106) expect a 25bps cut in December, bringing the fed funds rate to 4.25%-4.50%.
  • Market pricing shows less than a 60% chance of a December cut, reflecting uncertainty.

• 2025 Rate Cuts to be Shallower:

  • Economists expect shallower rate cuts in 2025 due to risks of higher inflation from President-elect Trump’s policies.
  • Fed funds rate is forecasted at 3.50%-3.75% by end-2025, 50bps higher than last month’s projection.

• Key Inflation Risks:

  • Trump’s proposed policies (higher tariffs, tax reductions, deregulation, protectionist trade policies) pose significant inflation risks.
  • Inflation is expected to remain above the Fed’s 2% target until at least 2027.
  • 85% of respondents believe the risk of inflation resurgence has risen for 2025.

• Economic Strength and Stubborn Inflation:

  • Persistent economic growth, robust stock markets, and inflation above target limit the Fed’s urgency for deeper cuts.
  • Fed Chair Jerome Powell noted the economy shows no signs of needing rapid rate reductions.

• Impact of Tariffs:

  • Most economists predict Trump’s tariffs will significantly impact the U.S. economy in 2025, potentially leading to higher inflation.
  • Tariffs on Chinese goods could cut Chinese economic growth by 1 percentage point.

• Employment and Wage Pressures:

  • Low unemployment and tighter immigration policies are expected to elevate wage pressures, contributing to inflation risks.

• Fed’s Policy Path:

  • The Fed is likely to deliver a 25bps cut in the first three quarters of 2025 before pausing.
  • There is no clear consensus on the terminal rate; projections range between 3.50%-4.00% or higher.

This article was written by Eamonn Sheridan at www.forexlive.com.