Economists Predict Fed Will Cut Rates in November and December
According to a unanimous forecast from 111 economists, the Federal Reserve is expected to cut the key interest rate by 25 basis points on November 7 and by the same amount in December. This prediction follows last month's half-point reduction, which lowered the federal funds rate to a range of 4.75% to 5.00%.
The upcoming policy meeting will commence immediately after the U.S. presidential election on November 5, which is turning out to be quite competitive, with Republican candidate Donald Trump gaining momentum recently.
Economists anticipate a return to a quarter-point cut next week, with more than 90% forecasting a similar reduction in December. This would bring the federal funds rate down to a range of 4.25% to 4.50%. Jefferies' senior economist Thomas Simons stated, "I expect a 25 basis point cut at each of the next two meetings." However, Simons also noted that the economy does not appear to need immediate easing.
The survey predicts a total reduction of 50 basis points in the first half of 2025 and an additional 25 basis points in the final quarter. This aims to bring the federal funds rate to a range of 3.00% to 3.25% by the end of 2025, slightly below the Fed's median projection.
Approximately 80% of economists expect the federal funds rate to be in the 3.00% to 3.25% range or higher by the end of next year, which is still considered a restrictive area. The Fed's current estimate of the neutral interest rate, the level that neither stimulates nor constrains the economy, stands at 2.9%.
Stephen Gallagher, chief U.S. economist at SocGen, noted that there could be a slight increase in Fed officials' views on neutral rates. This rate has already risen from 2.5% to 2.9% since the beginning of the year. Gallagher also argued that, given the economy's strength and potential challenges in reaching the 2% inflation target, the Fed should adopt a cautious approach.
Most economists believe that the late 2025 forecast may currently be higher than anticipated. Inflation is currently under control, and strong economic growth is expected to persist, which could eventually lead to a resurgence of inflationary pressures.
The personal consumption expenditures price index, the Fed's preferred inflation measure, is expected to slightly decline from 2.2% to 2.1% in September. The PCE inflation rate is projected to reach the 2% target in the upcoming quarter, averaging 2.1% and 2.0% in 2025 and 2026, respectively.
The U.S. economy is expected to grow above the Fed's non-inflationary growth rate of 1.8% in the coming years. The GDP growth rate was estimated at 3% year-over-year in the last quarter. In the context of the presidential election, both Trump and Democratic Vice President Kamala Harris have proposed economic policies that could potentially reignite inflation.
Most economists believe that Trump's policies, which include higher import tariffs and additional tax cuts, would be more inflationary. Brett Ryan, a senior U.S. economist at Deutsche Bank, pointed out that Trump’s proposals could significantly increase inflation risks, particularly when combined with tariffs.
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