Since Trump was elected to a second term last month, including Fed Chair Powell, Fed policymakers have stated that it is too early to incorporate the not-yet-detailed policies of the incoming U.S. president into their forecasts.
But eight years ago, Powell joined most of his colleagues as a Federal Reserve Governor, and the meeting minutes show that they did this: officials raised their expectations for economic momentum and interest rates to reflect the anticipated effects of Trump's tax cuts and other policies.
Therefore, when Fed policymakers gather this week, expected to make the third interest rate cut of the year and update their forecasts for growth, unemployment, and inflation, they may again raise their expectations for U.S. economic growth, which might not be surprising.
In September, officials estimated next year's growth rate at 2%. However, the Philadelphia Fed's survey of professional forecasters has raised the expectation for 2025 from the previous 1.9% to 2.2%.
Fed officials may also lower their forecasts for how much further they will cut rates next year. It is certain that they may be reluctant to blame Trump but rather point to recent data showing strong growth momentum, which could drive growth, curb unemployment, and keep them alert to inflation.
But this may still be an initial judgment of Trump's future actions, as he has promised further tax cuts, deregulation, and tariff increases.
Morgan Stanley economists wrote, 'We believe Powell, the Fed will make monetary policy based on actual changes in fiscal, trade, and immigration policies, rather than preemptively.' Even so, they noted that the Fed's policymakers' forecasts may show strong growth in 2024, a slowdown in the anti-inflation process this year and next, 'and fewer rate cuts.'
Since their last meeting in November, several Fed officials have indicated that they prefer a more cautious pace of rate cuts, especially as the labor market appears less fragile than when they began cutting rates in September and inflation is more persistent.
Their latest best guesses about the direction of the economy and interest rates for the next three years will be revealed in the latest quarterly forecast released at the end of the monetary policy meeting on December 17-18.
Even without considering the uncertain impacts of Trump's plans, there are ample reasons to believe that policymakers will find it more appropriate to reduce interest rates next year by a smaller margin, simply because they will be assessing overall stronger economic data since their last forecast.
According to the Fed's preferred inflation measure—the PCE price index—October's inflation rate was 2.3%, which is exactly what policymakers previously predicted for the inflation rate in the last quarter of this year.
But so far, the released data indicates that the core PCE price index is on track to reach about 2.8% by the end of the year, and several Wall Street analysts believe this inflation pressure will extend into 2025. Fed policymakers predicted a core PCE inflation rate of 2.6% for the fourth quarter of 2024 and 2.2% for the last quarter of 2025, and given recent trends, these estimates appear overly optimistic.
In contrast, the unemployment rate has consistently been lower than the predictions of Fed policymakers. It was 4.1% in October and 4.2% in November. Only a substantial deterioration this month would cause the fourth quarter average to rise to the 4.4% predicted by Fed policymakers at the September meeting, and analysts generally expect that the officials' new unemployment rate forecast will be a few percentage points lower than this.
A stronger labor market and stickier inflation may prompt some policymakers to lower their expectations for interest rate cuts. Most analysts expect that the median forecast from officials is for three 25 basis point cuts next year, which is consistent with current pricing in financial markets, although some believe that a more hawkish forecast of only two cuts is possible.
Analysts also expect policymakers to further lower the number of rate cuts in 2026, bringing the policy rate down to 3.4% or 3.1%, compared to the September forecast of 2.9%, the latter being equivalent to the 'stop point' for the federal funds rate that policymakers have consistently acknowledged.
Dallas Fed President Logan believes that as the Fed's policy rate approaches its final stopping point, it should slow down, just as a captain must when entering port. Some analysts expect this rate forecast to rise to 3% or even higher, further strengthening the Fed's case for slowing down.
The article is reposted from: Jin Ten Data
