Fed Expected to Cut Interest Rates Amid Rising Inflation Risks

By Indradip Ghosh
BENGALURU (Reuters) – The U.S. Federal Reserve is anticipated to cut interest rates by 25 basis points on December 18, based on 90% of economists surveyed by Reuters. Most expect a pause in late January due to concerns about rising inflation risks.

President-elect Donald Trump's proposed policies, which include import tariffs and tax cuts, are expected to be inflationary. Trump is likely to implement his agenda quickly after being inaugurated on January 20.

Recent news indicates that while the U.S. job market is cooling, it remains relatively resilient, reinforcing expectations that the Fed can afford another rate cut before reassessing government policy early next year.

Jonathan Millar, senior U.S. economist at Barclays, stated, "With the jobs report showing more slack despite solid income and job gains, we reiterate our call for another 25bp Fed cut in December."

According to a survey where 93 out of 103 economists predicted a 25 bps reduction at the Dec. 17-18 policy meeting, the federal funds rate would fall to 4.25%-4.50%. Conversely, ten economists anticipated no change.

Interest rate futures align with this prediction, nearly fully pricing in a quarter-point cut.

However, a clear majority of economists, 58 out of 99, expect the Fed to maintain rates at its January 28-29 meeting, shortly after Trump's return to the White House.

Stephen Juneau, a U.S. economist at Bank of America, remarked, "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."

The Fed aims to reach a neutral funds rate, which neither restricts nor stimulates the economy. Its recent assessment places that rate around 2.9%.

Fed Chair Jerome Powell indicated that policymakers "can afford to be a little more cautious as we try to find neutral" given the economy's strength and inflation exceeding previous forecasts.

Nearly 60% of economists, totaling 56 out of 97, predict at least three additional 25 bps rate cuts by year-end, bringing rates to 3.50%-3.75% or lower. This prediction has decreased from over 90% in October and 70% in November.

Millar added, "Next year, the emerging disagreements regarding the restrictiveness of monetary policy and the estimates of the neutral policy rate will likely intensify."

Higher tariffs on imports are anticipated to keep core inflation elevated in 2025. Consequently, the Fed might find it challenging to cut rates more than twice next year.

The U.S. economy, which saw a growth rate of 2.8% last quarter, is projected to expand by 2.1% next year and 2% in 2026, surpassing the non-inflationary growth rate of 1.8% forecasted by Fed officials.

The inflation outlook for 2025 has been upgraded. Approximately 75% of economists, 36 out of 48, assess the risk of inflation resurgence in the coming year as high, while the rest consider it low.

David Seif, chief economist for developed markets at Nomura, noted, "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."

The Fed is set to release its latest quarterly forecasts at the December meeting.