Is the Federal Reserve's rate-cutting cycle closer to stagnation than to starting? At least Deutsche Bank thinks so. The bank's chief U.S. economist, Matthew Luzzetti, expects the Federal Reserve to cut rates by 25 basis points for the last time in December and then pause.

Currently, the market is adjusting and repricing expectations for Federal Reserve rate cuts in 2025. The analyst stated in an interview with Bloomberg Television:

"I think when the Federal Reserve updates its economic projections in December, the unemployment rate will be revised down, economic growth will be revised up, and inflation will also be revised up. So, this dynamic certainly supports the Federal Reserve adopting a longer-term pause in policy."

Luzzetti listed two reasons supporting this dynamic.

First, the U.S. economy does not seem to be heading towards a slowdown, which alleviates the pressure on the Federal Reserve to support growth through rate cuts. Luzzetti mentioned that consumer resilience remains strong, and employment data is better than expected. Second, inflation is still above the 2% target level. In October, the consumer price index (CPI) rose 2.6% year-on-year, and investors will welcome the latest inflation data on Wednesday, which is the October personal consumption expenditures index (PCE).

Currently, inflation in the U.S. is still above the Federal Reserve's target level. Many on Wall Street expect inflation to rise further under President Trump's policies.

Luzzetti stated that Trump's policy mix will keep inflation above 2.5% since tax cuts have stimulated economic growth and spending, while Trump's protectionist trade policies may accelerate price increases.

After Trump announced a 25% tariff on goods from Mexico and Canada and an additional 10% tariff on goods from China, economists renewed their concerns about a higher inflation outlook. Economists believe consumers may bear the costs of tariffs as companies will raise prices to offset import costs.

Luzzetti expects the Federal Reserve to begin considering the White House's policies in the upcoming December meeting, but these factors will need to be more fully reflected in interest rate decisions in future meetings. He believes Trump's policies will push the neutral rate close to 4%. The neutral rate refers to an interest rate that neither stimulates nor suppresses the economy. Currently, the Federal Reserve's federal funds rate is between 4.50% and 4.75%.

However, others disagree. Earlier this month, Goldman Sachs predicted that by the end of 2025, the Federal Reserve's federal funds rate will drop to 3.25%-3.5% as Trump's tariff policies will weigh on economic growth in the short term.

Goldman Sachs believes the market is underestimating the extent of rate cuts by the Federal Reserve next year. Led by chief economist Jan Hatzius, Goldman Sachs analysts previously wrote, "If there is any difference, it is the threat of tariffs weighing on economic growth in the near term, and the Federal Reserve's leadership continuing to lean towards implementing policy normalization ahead of time, which enhances our confidence in consecutive rate cuts early next year."

Citigroup, on the other hand, stated that the Federal Reserve's significant rate cuts this year are not yet over, still expecting a major cut of 50 basis points in December. The bank pointed out that weakness in the labor market is beginning to show up in the data. Analyst Veronica Clark stated, "We are seeing weakness in labor market dynamics across many different data points: low hiring rates, low resignation rates, reduced new working hours... it really feels like labor demand is quite weak."

The article is reposted from: Jin Ten Data