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The Federal Reserve is expected to take a more cautious approach to rate cuts due to concerns that the Trump administration’s policies will lead to higher inflation, according to academic economists polled by the Financial Times. That’s what it means.
Economists surveyed Dec. 11-13 raised their expectations for next year’s federal funds rate compared to the previous FT Chicago Booth poll in September. A majority thought it would remain above 3.5% by the end of 2025, but a majority of respondents in September said it would probably fall below 3.5% by then.
If the Fed cuts rates by a quarter of a percentage point at next week’s meeting as expected, the policy rate would be between 4.25% and 4.5%.
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“In recent months, downside risks to the labor market have worsened somewhat and inflation progress appears to have stalled somewhat,” said Jonathan Wright, a former Federal Reserve economist now at Johns Hopkins University. investigation.
“Inflation has come down more painlessly than I and most people expected, but I think that last part (achieving the target) is still seen as being a little more difficult, so certainly “This is an environment in which the Fed is unlikely to achieve inflation in its rush to cut rates,” Wright said.
Tara Sinclair, who previously worked at the Treasury Department and is now a professor at George Washington University, said this could even lead to an extended Fed pause after the December rate cut, leaving rates on hold for the rest of next year. He said that there is.
“In my view, we need to stay in a much more restrictive zone until it becomes clear that inflation is back on target,” he added.
Officials are planning how quickly to reach a “neutral” policy rate that neither promotes nor suppresses growth. Both countries have publicly discussed slowing the pace of cuts once they approach that level, but Chairman Jay Powell acknowledged that policymakers lacked clarity about that level.
“It’s definitely going to be below current levels,” he told reporters in November.
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Regarding the policy outlook, the return of Donald Trump to the White House next month is a major concern. President Trump has vowed to cut taxes and regulations while imposing sweeping tariffs and deporting millions of Americans.
The survey, conducted in conjunction with the University of Chicago Booth School of Business, found that just over 60% of economists thought President Trump’s plan would have a negative impact on U.S. growth. Most are also bracing for higher inflation if his plan to enact universal tariffs and high levies on China comes to fruition.
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While concerns about price pressures remain, these concerns are gaining ground.
More than 80% of the 47 economists surveyed said that inflation, as measured by the Personal Expenditure Price Index, which subtracts food and energy prices, will not fall below 2% over the next year until after January 2026. I answered no. In the September survey, only about 35% of respondents made the same estimate.
The median forecast for core PCE inflation over the next 12 months also increased from 2.2% to 2.5% compared to the September survey.
Economists remained optimistic about the economic outlook, with the median forecast for real GDP growth rising to 2.3% from 2% in September. Fears of a recession are also far away, with more than half of respondents expecting the next recession to begin by the third quarter of 2026.
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But Sinclair warned that in the long term, President Trump’s policies will begin to have an impact.
“I definitely think that in the long term, this policy mix is not good,” she said.
Economists have also warned that the Fed could struggle to figure out how to weather this period, and if the Fed is forced to keep rates high to counter the impact of President Trump’s policies, the next He warned that some people were preparing for a “showdown” between the president and Mr. Powell.
Wright said the Fed will be “more sensitive” about inflation than it has been in the past, given the upward price pressures in the wake of the pandemic.
“Back in 2019, the Fed had the luxury of taking the view that they would wait until they saw the whites of inflation,” he said. “I don’t think the Fed would behave that way today.”
