Since Trump's election to a second term last month, Fed policymakers, including Chairman Powell, have indicated that it is too early to incorporate the yet-to-be-detailed policies of the incoming U.S. president into their forecasts.
But eight years ago, Powell joined the majority of his colleagues as a Federal Reserve governor, and the meeting minutes showed that they did this: officials raised their expectations for economic momentum and interest rates to reflect the anticipated impacts of Trump's tax cuts and other policies.
Therefore, when Fed policymakers gather this week, expected to make the third rate cut of the year and update their forecasts for growth, unemployment, and inflation, it may not be surprising if they again raise their expectations for U.S. economic growth.
In September, officials estimated next year's growth rate to be 2%. However, the Philadelphia Fed's survey of professional forecasters has raised the 2025 expectation from a previous 1.9% to 2.2%.
Fed officials may also lower their predictions for how much further they will cut rates next year. It is certain that they may be reluctant to attribute this to Trump, instead pointing to recent data showing strong growth momentum, which could drive growth, curb unemployment, and keep them vigilant about inflation.
But this may still be a preliminary judgment on Trump's future actions, as he has promised further tax cuts, deregulation, and tariffs.
Morgan Stanley economists wrote, "We believe Powell and the Fed will base monetary policy on actual changes in fiscal, trade, and immigration policies, rather than preemptively." Even so, they stated that Fed policymakers' forecasts may indicate 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 tend to take a more cautious pace for rate cuts, especially as the labor market appears less fragile than it did when they began cutting rates in September, with inflation being stickier.
Their latest best guesses for the direction of the economy and interest rates over the next three years will be released in the latest quarterly forecast at the conclusion of the meeting on December 17-18.
Even without considering the uncertain impacts of Trump's plans, there is ample reason to believe that policymakers will find a smaller rate cut more appropriate next year, simply because they will be assessing the overall stronger economic data since the last forecast.
According to the Fed's preferred inflation gauge—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.
However, the data released so far indicates that the core PCE price index is heading toward about 2.8% by the end of the year, with several Wall Street analysts believing that this inflationary pressure will extend into 2025. Fed policymakers predicted in September that the core PCE inflation rate for the fourth quarter of 2024 would be 2.6% 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 significant deterioration this month would cause the average for the fourth quarter to rise to the 4.4% predicted by Fed policymakers at the September meeting, and analysts generally expect officials' new unemployment rate forecasts to be a few percentage points lower than this.
A stronger labor market and stickier inflation could prompt some policymakers to lower their expectations for rate cuts. Most analysts expect the median forecast among officials to be three rate cuts of 25 basis points each next year, which aligns with the current pricing in financial markets, although some believe that a more hawkish forecast of only two rate cuts is possible.
Analysts also expect policymakers to further lower the number of rate cuts for 2026, bringing the policy rate down to 3.4% or 3.1%, compared to the September forecast of 2.9%, which corresponds to the "stopping point" of the federal funds rate that policymakers have consistently recognized.
Dallas Federal Reserve President Logan believes that as the Fed's policy rate approaches its final stopping point, the pace should slow, just as a captain must do when entering a port. Some analysts expect this rate forecast to rise to 3% or even higher, further strengthening the case for the Fed to slow down.
Article reposted from: Jin Shi Data