Fed Rate Cut Expected, Economists Divided on Future Path

A Reuters poll of economists indicates that the Federal Reserve is expected to cut interest rates by 25 basis points at its next policy meeting, with an additional cut anticipated in December. However, significant disagreement remains among economists regarding the level interest rates will reach by the end of next year. A month ago, economists were only anticipating one further rate cut this year. But as Fed policymakers have recently shifted toward supporting additional cuts, the new forecasts have been adjusted accordingly. The Federal Reserve currently faces a dual risk: tariffs potentially causing already elevated inflation to climb higher, and a potentially weakening labor market. The Fed appears to be placing greater emphasis on the latter risk, and thus last month implemented its first 25 basis point rate cut since December 2023. Of the 117 economists surveyed, all but two predicted the Fed would implement another 25 basis point rate cut, bringing the target range down to 3.75%-4.00%. The other two anticipate a 25 basis point cut in October and a 50 basis point cut in December. The proportion of economists supporting another rate cut in December fell to 71%. The survey was conducted from October 15-21. Financial market traders are fully pricing in further monetary easing. Multiple members of the Federal Open Market Committee (FOMC), including Fed Chairman Jerome Powell, have indicated they will continue to closely monitor the labor market. However, the government shutdown, now in its third week, has delayed the release of key official employment and inflation data, clouding the economic outlook. "Frankly, about half the FOMC right now is more focused on the labor market, and the other half are focused on inflation risks," said Ryan Wang, U.S. economist at HSBC. "The Fed’s challenge is determining whether the slowdown in job growth primarily reflects labor demand exceeding supply. It is difficult to accurately determine which factor is more influential, and this will determine how monetary policy should respond." Recent private sector data suggests that layoffs and hiring have been relatively moderate, suggesting no significant changes in the labor market. The median survey forecast shows that the unemployment rate will remain at its current level of around 4.3% on average annually through 2027, broadly consistent with last month’s forecast. The latest survey also revealed that the Fed’s 2% inflation target, as measured by personal consumption expenditures (PCE), is expected to remain above 2% on average annually through 2027. The Consumer Price Index (CPI) report, delayed until October 24, is expected to show that consumer inflation rose last month from 2.9% in August to 3.1%. Economists provided seven different forecasts for the level of the interest rate by the end of next year, ranging from 2.25%-2.50% to 3.75%-4.00%. Some of this increased uncertainty stems from speculation about who will succeed Chairman Powell as Fed chair after his term ends in May of next year. In answering an additional question, 76% of the 33 economists (or 25 people) believe that the greater risk facing the Fed’s interest rate policy at the end of the current monetary policy cycle is keeping interest rates too low. U.S. President Donald Trump has been pressuring Powell for months to cut interest rates aggressively. "The risk is that there could be more rate cuts next year," said Brett Ryan, senior U.S. economist at Deutsche Bank. "The risk of the Fed losing its independence is higher than under any previous administration." A key challenge for the Fed is balancing the potential risks posed by inflation against the risks of slowing economic growth. Some economists argue that the Fed's focus on the labor market is too narrow and that it should pay more attention to broader economic indicators. Others argue that the Fed's independence is crucial for maintaining price stability and that political pressure could undermine its credibility.