The Federal Reserve is set to take a more cautious approach to interest rate cuts on fears that the Trump administration’s policies will stoke higher inflation, according to academic economists polled by the Financial Times.
The economists, who were surveyed between December 11 and 13, moved up their forecasts for the federal funds rate next year compared to the previous FT-Chicago Booth poll in September. The vast majority thought it would hover at 3.5 per cent or higher by the end of 2025, whereas most respondents in September said it would probably fall below 3.5 per cent by that point.
If the Fed follows through with a quarter-point cut at its meeting next week as expected the policy rate will stand at 4.25-4.5 per cent.
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“Over the last few months, the downside risks to the labour market have become a little less bad and progress on inflation seems to have stalled a bit,” said Jonathan Wright, a former Fed economist now at Johns Hopkins University, who helped to design the survey.
“Inflation has come down more painlessly than I and most people had expected, but I think we may still be seeing that the last bit [getting to target] will be a little harder, and so that certainly is an unlikely environment for the Fed to be in a hurry to reduce rates,” said Wright.
Tara Sinclair, who previously worked at the Treasury department and is now a professor at George Washington University, said that could even translate to the Fed going on an extended pause after a December cut and holding interest rates steady for the remainder of next year.
“In my mind, they need to stay in restrictive territory all the way until it’s clear that inflation is back at their target,” she added.
Officials are plotting how quickly to get to a “neutral” policy rate that neither stimulates nor suppresses growth. They have openly discussed slowing the pace of cuts once they get closer to that level, although chair Jay Powell has conceded that policymakers lack clarity as to where that is.
“We’re pretty sure it’s below where we are now,” he told reporters in November.
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Looming large over the policy outlook is the return of Donald Trump to the White House next month. Trump has vowed to enact sweeping tariffs and deport millions of Americans while also slashing taxes and regulations.
Just over 60 per cent of the economists polled in the survey, which was conducted in partnership with the University of Chicago Booth School of Business, thought Trump’s plans would have a negative impact on US growth. Most are also bracing for higher inflation if his plans to enact universal tariffs and steep levies on China materialise.
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These concerns are percolating at a time when worries about price pressures still linger.
Just over 80 per cent of the 47 economists polled said that inflation over the next year, as measured by the personal expenditures price index once food and energy prices are stripped out, would not dip below 2 per cent until January 2026 or later. In September, only about 35 per cent of polled respondents made the same estimate.
The median estimate of core PCE inflation over the next 12 months also rose to 2.5 per cent from 2.2 per cent compared to September’s survey.
Economists remained sanguine about the outlook for the economy, with the median estimate of real GDP growth rising to 2.3 per cent from 2 per cent in September. Concerns about a recession were also distant, with over half of respondents estimating that the next recession would start no earlier than the third quarter of 2026.
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Yet over a longer horizon, Sinclair warned that Trump’s policies would start to bite.
“I think very clearly in the long run this combination of policies is not good,” she said.
The Fed may also struggle with how to navigate this period, the economists warned, with one bracing for a “confrontation” between the president-elect and Powell if the central bank is forced to keep rates elevated to counteract the impact of Trump’s policies.
Wright said the Fed would be “more twitchy” on inflation than in the past, given the post-pandemic surge in price pressures.
“Back in 2019, the Fed could afford to take a view of ‘we’re going to wait until we see the white of inflation’s eyes’”, he said. “I don’t think that’s the attitude that the Fed is going to have today.”
