By Indradip Ghosh
BENGALURU (Reuters) – The U.S. Federal Reserve will cut interest rates by 25 basis points on Dec. 18, according to 90% of economists polled by Reuters, with most expecting a pause at the end of January on concerns about rising inflation risks.
Newly elected President Donald Trump’s proposed policies, from import tariffs to tax cuts, are expected to be inflationary. Trump is expected to take swift action on his agenda shortly after he is inaugurated on January 20.
Friday’s news that the US labor market cooled further but remained relatively resilient reinforced expectations that the Fed can afford to cut rates again before taking stock of government policy early next year.
“With the jobs report showing more underperformance despite solid income and job gains, we reiterate our call for another 25bp Fed cut in December,” said Jonathan Millar, senior U.S. economist at Barclays.
An overwhelming majority of economists, 93 out of 103, in the post-jobs poll expected a 25 basis point cut at the Dec. 17-18 policy meeting, putting the Federal Funds Rate at 4.25%-4.50% . Ten saw no change.
Interest rate futures are in line, with a quarter-point cut almost fully priced in.
But a clear majority of economists, 58 out of 99, predicted that the Fed, which has already cut the fed funds rate by a total of 75 basis points since September, would maintain rates at its Jan. 28-29 meeting. That would be just over a week after Trump returned to the White House.
Furthermore, there is no clear consensus among economists on what the Fed will do.
“They (the Fed) are going to wait and see what happens next year, what is actually implemented and what is presented as some kind of risk,” said Stephen Juneau, a U.S. economist at Bank of America.
The Fed is currently on a mission to bring the funds rate to neutral, which does not constrain or stimulate the economy. The most recent estimate of that percentage is around 2.9%.
Fed Chairman Jerome Powell recently said policymakers “can afford to be a little more cautious as we try to be neutral” because the economy is stronger and inflation exceeded the central bank’s expectations in September.
Nearly 60% of economists, 56 out of 97, forecast at least three more rate cuts of 25 basis points to 3.50-3.75% or lower by the end of next year. That majority has fallen from more than 90% in October and more than 70% in November.
“Next year, emerging disagreements over the degree of restrictiveness of monetary policy, or correspondingly over estimates of the neutral policy rate, are likely to become more contentious,” Barclays’ Millar said.
