Reuters published its Fed survey overnight. In summary from the report:
December Rate Cut Likely:
- Nearly 90% of economists (94 out of 106) expect a 25bps cut in December, bringing the fed funds rate to 4.25%-4.50%.
- Market pricing shows less than a 60% chance of a December cut, reflecting uncertainty.
2025 Rate Cuts to be Shallower:
- Economists expect shallower rate cuts in 2025 due to risks of higher inflation from President-elect Trump's policies.
- Fed funds rate is forecasted at 3.50%-3.75% by end-2025, 50bps higher than last month’s projection.
Key Inflation Risks:
- Trump's proposed policies (higher tariffs, tax reductions, deregulation, protectionist trade policies) pose significant inflation risks.
- Inflation is expected to remain above the Fed’s 2% target until at least 2027.
- 85% of respondents believe the risk of inflation resurgence has risen for 2025.
Economic Strength and Stubborn Inflation:
- Persistent economic growth, robust stock markets, and inflation above target limit the Fed’s urgency for deeper cuts.
- Fed Chair Jerome Powell noted the economy shows no signs of needing rapid rate reductions.
Impact of Tariffs:
- Most economists predict Trump's tariffs will significantly impact the U.S. economy in 2025, potentially leading to higher inflation.
- Tariffs on Chinese goods could cut Chinese economic growth by 1 percentage point.
Employment and Wage Pressures:
- Low unemployment and tighter immigration policies are expected to elevate wage pressures, contributing to inflation risks.
Fed’s Policy Path:
- The Fed is likely to deliver a 25bps cut in the first three quarters of 2025 before pausing.
- There is no clear consensus on the terminal rate; projections range between 3.50%-4.00% or higher.
