Economists cut Fed rate cut estimates on fears of Trump’s inflation rise

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According to academic economists surveyed by the Financial Times, the Federal Reserve will take a more cautious approach to interest rate cuts for fear that the Trump administration’s policies will stoke higher inflation.

Economists, who were surveyed between Dec. 11 and Dec. 13, raised their forecasts for the federal funds rate next year compared to the previous FT-Chicago Booth survey in September. The vast majority thought it would be around 3.5 percent or higher by the end of 2025, while most of those surveyed in September said it would likely fall below 3.5 percent by then.

If the Federal Reserve goes ahead with a quarter-point cut at its meeting next week, as expected, the official interest rate will be between 4.25 and 4.5 percent.

“In recent months, the downside risks to the labor market have become a little less severe and progress on inflation appears to have stalled a little,” said Jonathan Wright, a former Fed economist now at Johns University. Hopkins, who helped design the survey.

“Inflation has come down less painfully than I and most people expected, but I think we may still be seeing that the last stretch (getting to the target) will be a little more difficult, so it’s certainly an unlikely environment.” so that the Federal Reserve “We are in a hurry to reduce rates,” Wright said.

Tara Sinclair, who previously worked at the Treasury Department and is now a professor at George Washington University, said that could even translate into the Federal Reserve taking an extended pause after a cut in December and keeping interest rates steady for the rest of next year.

“In my view, they should remain in restrictive territory until it is clear that inflation has returned to its target,” he added.

Officials are planning how quickly they will reach a “neutral” policy rate that neither stimulates nor suppresses growth. They have openly discussed slowing the pace of cuts once they approach that level, although Chairman Jay Powell has admitted that policymakers are unclear about where that level is.

“We’re pretty sure it’s below where we are now,” he told reporters in November.

Looming over the political outlook is Donald Trump’s return to the White House next month. Trump has promised to enact sweeping tariffs and deport millions of Americans while cutting taxes and regulations.

Just over 60 percent of the economists surveyed in the surveywhich was carried out in collaboration with the University of Chicago Booth School of Business, thought that Trump’s plans would have a negative impact on US growth. Most are also bracing for higher inflation if their plans to enact universal tariffs and high levies on China materialize.

These concerns are percolating at a time when concerns about price pressures still persist.

Just over 80 percent of the 47 economists surveyed said inflation over the next year, measured by the personal spending 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 percent of respondents made the same estimate.

The median estimate of core PCE 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 economy’s prospects, with the median estimate for real GDP growth rising to 2.3 percent from 2 percent in September. Concerns about a recession were also distant: more than half of respondents estimated that the next recession would begin no earlier than the third quarter of 2026.

However, on a broader horizon, Sinclair warned that Trump’s policies would begin to take effect.

“I think it’s very clear that, in the long run, this policy mix is ​​not good,” he said.

The Federal Reserve could also struggle to navigate this period, economists warned, preparing for a “showdown” between the president-elect and Powell if the central bank is forced to keep rates elevated to offset the impact of Trump’s policies.

Wright said the Federal Reserve would be “more nervous” about inflation than in the past, given increased price pressures post-pandemic.

“In 2019, the Fed could afford to take a ‘let’s wait until we see the whites of inflation’s eyes’ stance,” he said. “I don’t think that’s the attitude the Fed is going to have today.”