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The Federal Reserve is set to take a more cautious approach to interest rate cuts amid concerns that the Trump administration's policies will lead to higher inflation, according to academic economists polled by the Financial Times.
Economists surveyed Dec. 11-13 raised their forecasts for next year's federal funds rate compared to the previous FT-Chicago Booth poll in September. The vast majority thought it would hover at or above 3.5 percent by the end of 2025, while most respondents in September said it would likely fall below 3.5 percent by that point.
If the Fed continues to cut rates by a quarter of a percentage point at its meeting next week as expected, the interest rate will reach 4.25-4.5 percent.
“Over the past few months, the downside risks to the labor market have become less dire and the progress in inflation appears to have stalled a bit,” said Jonathan Wright, a former Fed economist now at Johns Hopkins University, who helped design the plan. . Scanning.
“Inflation has come down more easily than I and most people expected, but I think we probably still see that last part (getting the target) going to be a little bit harder, and that's certainly an unlikely environment for the Fed to pull back.” “Be in a hurry to lower interest rates,” Wright said.
That could translate to the Fed pausing for an extended period after the December cut and keeping interest rates steady for the rest of next year, said Tara Sinclair, who formerly worked at the Treasury Department and is now a professor at George Washington University.
“In my opinion, they should stay in the restricted area all the way until it is clear that inflation is back to their target,” she added.
Officials are planning how quickly a “neutral” interest rate can be reached that neither stimulates nor inhibits growth. They have publicly discussed slowing the pace of cuts once they get close to that level, though Chairman Jay Powell has acknowledged that policymakers lack clarity on where that goes.
“We are certain that the price is below the level we are at now,” he told reporters in November.
The political prospects of Donald Trump's return to the White House next month loom large. Trump has pledged to enact sweeping tariffs and deport millions of Americans while also cutting taxes and regulations.
Just over 60 percent of economists surveyed in reconnaissancewhich was conducted in partnership with the University of Chicago Booth School of Business, believed that Trump's plans would have a negative impact on growth in the United States. Most are also bracing for higher inflation if his plans to trigger global tariffs and hefty duties on China come true.
These concerns are spreading at a time when concerns about price pressures remain.
Just over 80 percent of the 47 economists surveyed said inflation over the next year, as measured by the personal expenditures price index once food and energy prices are excluded, would not fall below 2 percent until January 2026 or later. . In September, only about 35% of survey respondents gave the same estimate.
The average estimate of core personal consumption expenditures inflation over the next 12 months also rose to 2.5 percent from 2.2 percent compared to the September survey.
Economists remained optimistic about the economic outlook, with the average estimate for real GDP growth rising to 2.3 percent from 2 percent in September. Recession concerns were also distant, with more than half of respondents estimating that the next recession would not begin before the third quarter of 2026.
However, in the long term, Sinclair warned that Trump's policies will begin to have an impact.
“I think very clearly that this mix of policies is not good in the long run,” she said.
Economists have warned that the Fed may also struggle with how to handle this period, with one preparing for a “showdown” between the president-elect and Powell if the central bank is forced to keep interest rates high to counter the impact of Trump's policies.
Wright said the Fed will be “more turbulent” on inflation than in the past, given higher price pressures after the pandemic.
“Going back to 2019, the Fed could have taken the view that we would wait to see the whites of inflation’s eyes,” he said. “I don't think that's the position the Fed would take today.”
