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.

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