Federal Reserve Rate Cut Prospects Diminish as Economists Raise Long-Term Rate Forecast
According to a joint survey by the Financial Times and the University of Chicago Booth School of Business, economists have significantly increased their forecasts for the U.S. federal funds rate by 2025 compared to September. Over 60% of respondents believe the interest rate will remain at 3.5% or higher by the end of 2025, whereas in September, most anticipated the rate would fall below 3.5%. If the Federal Reserve decreases rates by 25 basis points this week as expected, the policy rate would remain in the 4.25%-4.5% range.
Former Federal Reserve economist Jonathan Wright noted that although inflation is decreasing faster than expected, reaching the 2% target remains challenging, which could slow down the Fed's pace of cutting rates. He added, "The Federal Reserve is unlikely to rush into rate cuts, especially with a stable labor market."
George Washington University Professor Tara Sinclair suggested that after a December rate cut, the Federal Reserve may extend the pause on cutting rates and keep them stable through 2024 until inflation clearly recedes.
Trump Policies Could Become Variables for Economy and Inflation
Economists warn that Trump's return to the White House could significantly impact Federal Reserve policy and the U.S. economy. Trump's proposals for comprehensive tariffs, tighter immigration policies, and plans for tax and regulatory adjustments are believed by most economists to negatively affect U.S. economic growth. Slightly over 60% of respondents in the survey indicated that Trump's policies could hamper economic growth while exacerbating inflation risks.
Forecasts for the core Personal Consumption Expenditure Price Index (PCE) show that over 80% of economists believe the core PCE will not fall below 2% until January 2026 or later, compared to only 35% of respondents in September who shared the same view. Additionally, the median forecast for core PCE over the next 12 months rose from 2.2% in September to 2.5%.
Optimism for Economic Growth, but Long-Term Worries Emerge
Despite persistent inflation pressures, economists remain optimistic about the economic outlook for next year. The median forecast for real GDP growth rose from 2% in September to 2.3%. The risk of economic recession is considered low in the short term, with more than half of respondents predicting that the next recession could occur after the third quarter of 2026.
However, in the long run, Trump's policies may negatively impact the economy. Sinclair highlighted concerns over the long-term effects of this policy mix, which could force the Federal Reserve to maintain high rates to offset policy impacts, further complicating policy execution.
Federal Reserve Faces Difficult Policy Decisions
With core inflation remaining high and policy uncertainties increasing, the Federal Reserve may need to balance economic growth with inflation management. If Trump's policies significantly drive up inflation, the Fed could be forced to maintain high interest rates, potentially intensifying policy disagreements between Trump and Powell, and even sparking "confrontation."
In the future, the Federal Reserve's policy path will be constrained by multiple factors, including inflation developments, economic growth, and the actual impact of Trump's policies. This period could be highly challenging for the Federal Reserve, and investors need to closely watch the direction of future monetary policies.
