Economists' latest forecast: The Federal Reserve will cut interest rates in December, but the reduction next year will be "halved."

A recent survey by foreign media shows that most economists expect the Federal Reserve to continue cutting interest rates next month, but due to the policies proposed by incoming President Trump that may lead to rising inflation, the rate cuts in 2025 will be smaller than they anticipated a month ago. Trump's planned policies, including increased tariffs and tax cuts, have nearly halved market expectations for the Federal Reserve's rate cuts by the end of 2025, reducing it to about 75 basis points. The sustained strong economic growth, stubbornly high inflation, and record highs in the stock market have become obstacles to the Federal Reserve's rapid rate cuts. Federal Reserve Chairman Jerome Powell stated last week, “The economy has not sent any signals that require us to rush to lower interest rates.” Nevertheless, in a survey conducted from November 12 to 20, nearly 90% of economists (94 out of 106) expect the Federal Reserve to cut rates by 25 basis points in December, bringing the federal funds rate down to 4.25%-4.50%. Twelve economists expect rates to remain unchanged, whereas only three economists held this view in last month's survey. However, market pricing indicates that the likelihood of a rate cut in December is now less than 60%. Stephen Juneau, an economist at Bank of America, stated, “**We still expect the Federal Reserve to cut rates in December, and we believe the data will meet expectations, but it is understandable why the market feels this is a bit like flipping a coin. The U.S. economy remains very strong, and inflation is still above target levels. We will see deregulation, looser fiscal policies, more protectionist trade policies, and stricter immigration policies. All of these will pose upward risks to inflation...The Federal Reserve is unlikely to cut rates as significantly as we previously considered, as they will see inflation persistently above their target level.” Bank of America recently raised its final forecast for the federal funds rate to 3.75%-4.00%, up from 3.00%-3.25%. The median of the survey shows that economists' expectations for U.S. inflation over the next two years are generally higher than last month, with the Fed's preferred inflation measure—the Personal Consumption Expenditures (PCE) inflation—expected to remain primarily above the Fed's 2% target at least until 2027. 85% of respondents (57 out of 67) indicated that the risk of inflation recovery next year has increased. Most economists stated that the tariffs proposed by Trump will be implemented early next year, and the vast majority of respondents (44 out of 51) believe this will have a significant impact on the U.S. economy. Philip Marey, senior U.S. strategist at Rabobank, stated, “Imposing universal tariffs on all imported goods could lead to a rebound in inflation. Remember, the unemployment rate remains relatively low, especially with increased border security, wage pressures will soon rise again. This can only strengthen our long-held view that the Federal Reserve's rate-cutting cycle will end earlier in 2025.” The median of the survey shows that the Federal Reserve will cut interest rates by 25 basis points in the first three quarters of next year and then pause the cuts, with the federal funds rate expected to reach 3.50%-3.75% by the end of 2025, which is 50 basis points higher than last month's forecast. However, economists do not have a clear consensus. Nearly 30% of economists (29 out of 99) predict that rates will be in the range of 3.75%-4.00% or higher, while 28 economists believe rates will be in the 3.50%-3.75% range, above the Federal Reserve's current estimate of a neutral rate (neither stimulating nor suppressing the economy) of 2.9%. In this month's and last month's surveys, there were 72 common participants, with two-thirds of the economists (48) raising their average forecast for the federal funds rate at the end of 2025 by about 50 basis points. The median of the survey shows that the annualized growth rate of the U.S. economy in the last quarter was 2.8%, expected to grow by 2.7% this year, and by 2% in 2025 and 2026. This is faster than the Federal Reserve officials' current forecast of a non-inflationary growth rate of 1.8% in the coming years.