Economists expect one more Fed cut before slower policy easing in 2025

Federal Reserve officials will lower interest rates this month for a third straight time and pare back the number of rate cuts they anticipate next year, according to economists surveyed by Bloomberg News.

Fed Chair Jerome Powell and his colleagues are expected to deliver another quarter-point rate cut at their Dec. 17-18 meeting, bringing the central bank’s key benchmark rate down to a range of 4.25% to 4.50%. That would mark a full percentage point of reductions since September.

Rate cuts are seen slowing next year by more than officials projected three months ago, with a majority of economists predicting just three reductions in 2025 amid less progress on cooling inflation down toward the central bank’s 2% target.

“The case for further US rate cuts beyond this month has decreased meaningfully,” said Dennis Shen, an economist with Scope Ratings. “Inflation has remained sticky, the economy and financial markets are overheating, the slight rise in unemployment earlier this year has reversed and the incoming Trump administration threatens more near-term inflation risk.”

After next week’s meeting, economists expect the Fed to hold rates steady at the January gathering and cut again in March. The two remaining 2025 reductions will come in June and September, according to the median estimates in the Bloomberg survey of 50 economists. The survey was conducted Dec. 6-11. 

Forecasts for the US economy and monetary policy have changed markedly from just a few months ago, when concern about a weakening labor market had many economists predicting a more aggressive path of rate reductions in 2025. 

In September, most respondents were more concerned with the employment picture deteriorating than with a stalling in inflation progress. Now, that dynamic has flipped.

After substantially cooling from a four-decade high in 2022, inflation has held at roughly the same elevated level for months. Data out earlier this week showed a key gauge of consumer prices that strips out food and energy costs rose 3.3% on a year-over-year basis, a point first reached in June. 

Without additional progress toward the central bank’s goal, policymakers may have to keep interest rates at higher levels to bring inflation down further. Economists expect Fed officials to mark up their forecasts for price growth slightly in 2025 while continuing to see 2% inflation in 2026. 

That persistence in price pressures, and continued solid economic growth, will likely further drive up policymakers’ estimates of the neutral rate of interest, where policy neither stimulates nor weighs on the economy, to 3% from 2.9% in September. 

Trump Impact

While economists are split on how exactly President-elect Donald Trump’s policy proposals — including mass deportations, a fresh round of tariffs and renewed tax cuts — will ultimately impact the economy, most forecasters do anticipate fewer rate cuts in 2025 as a result of those policies. 

“We look for the Fed to hold rates steady early next year as they assess prospective policy changes under the Trump administration and take stock of the economic and inflation environment at that time,” said Kathy Bostjancic, chief economist at Nationwide.

Economists don’t see much change to key parts of the post-meeting statement this time. A large majority of them see Fed officials keeping their current characterization of inflation as somewhat elevated and unemployment as low. 

But they could indicate an intention to move at a more gradual pace in the part of the statement that references future adjustments to policy, according to Brett Ryan, senior US economist at Deutsche Bank. 

Nearly a third of those surveyed said there could be a dissent at this meeting, most likely from Governor Michelle Bowman, who voted against September’s outsize rate reduction and has expressed concern about inflation.

Economists are more mixed about the future of balance-sheet policy. While a majority think the current caps on how many Treasuries and mortgage-backed securities the Fed allows to mature off its balance sheet might be reduced in the first half of 2025, there’s less certainty about when the process known as quantitative tightening will come to a complete end. 

Some 36% of economists think that will happen in the first half of next year but 38% don’t see it ending until 2026.