There is now a 40% chance that the Fed will raise rates again next year, a top economist says

• Sustained economic strength along with inflationary policies Newly elected President Donald Trump’s expectations could mean the Federal Reserve will have to resort to rate hikes in 2025, a top economist has warned.

Wall Street just threw a tantrum over indications that the Federal Reserve will make fewer interest rate cuts next year than expected, but a top economist has warned that a rate hike is also possible.

This is what Torsten Sløk, chief economist at Apollo Global Management, said, who attempted to calculate the chances of an increase.

“The strong economy, combined with the potential for lower taxes, higher rates and restrictions on immigration, has increased the risk that the Fed will have to raise rates in 2025,” he wrote in a note Thursday. “We see a 40% chance that the Fed will raise rates in 2025.”

In fact, the economy is so robust that the Commerce Department last week revised upward its third-quarter growth rate to 3.1%, up from a previous estimate of 2.8% and the second quarter’s 3% growth rate – meaning GDP has accelerated slightly.

And estimates for the current quarter show no signs of slowing down. The Atlanta Fed’s GDPNow forecast points to further growth of 3.1% for the fourth quarter. Sløk noted that the latest estimate is well above the Congressional Budget Office’s long-term growth rate of 2%.

Meanwhile, newly elected President Donald Trump campaigned on tax cuts, higher tariffs and an immigration crackdown, which are widely seen as increasing inflationary pressures.

With inflation still stubbornly above the Fed’s 2% target, this policy could leave central bankers with less room to cut rates further after cutting rates by 100 basis points this year to 4.25%-4. 50%.

In their economic projections for next year, Fed officials appeared to take these steps into account as they significantly raised inflation expectations without comparable changes in economic growth and unemployment estimates.

“For investors, it’s starting to look like 2022: too high inflation, rising interest rates and falling stock prices,” Sløk added.

In 2022, the S&P 500 fell 19% and the Nasdaq fell 33%, as markets suffered their worst year since 2008.

Others on Wall Street also see a more aggressive stance from the Fed next year. Market veteran Ed Yardeni said in a note on Wednesday that there is a greater chance of only one or even no rate cuts next year.

That’s because the so-called neutral rate – the level that neither accelerates nor slows growth – remains uncertain as analysts assess whether the economy can now withstand tighter monetary policy than before.

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