Fed decision prediction, as of early 2025, the Federal Reserve's decision on whether to raise interest rates again remains uncertain, influenced by various economic indicators and ongoing discussions among policymakers.
With Donald Trump officially beginning his second term and signing a series of executive orders, he has threatened to impose a 25% tariff on Canada and Mexico as early as February 1. However, it remains unclear what actions the Trump administration will take regarding these tariffs, as the information surrounding them is inconsistent, with varying figures being discussed.
The scale and effectiveness of Trump's deportation plans are still uncertain, but they will undoubtedly impact the labor supply.
Another key aspect of Trump's administration is the budget. He has halted over $300 billion in infrastructure spending initiated during the Biden administration. However, the upcoming establishment of the Department of Government Efficiency (DOGE) may find its ambitious spending cut plans challenging to implement.
In summary, many factors remain unresolved. Therefore, the Federal Reserve is expected to keep interest rates unchanged in January and adopt a very cautious approach in the coming months.
The Monetary Policy Radar team from the Financial Times also anticipates that the Fed will remain on hold in January, expecting only two rate cuts throughout 2025. They see no reason to alter this prediction but caution that circumstances could change as Trump’s policies take shape.
In an optimistic scenario, if Trump avoids policies that would obviously exacerbate inflation, the Fed could move more quickly toward a neutral rate, especially given weaker seasonal price boosts in early 2025 compared to last year. Conversely, in a worst-case scenario, policies that stimulate economic growth and exacerbate inflation could hinder the Fed’s ability to cut rates this year, or even lead to discussions about raising them. The Monetary Policy Radar team currently assesses the latter as more likely.
The team believes there is a higher probability of rate increases, particularly starting in the second half of 2025. However, they acknowledge that if inflation declines faster than expected—especially if Trump's policies turn out to be bluster rather than substantial actions—there could be significant opportunities for Fed rate cut.
By March, the Fed is expected to maintain rates as the Trump administration will still be in its early stages, with no significant price effects from enacted policies. Nonetheless, the potential for rate cuts remains, and confidence in keeping rates steady is low. Several months of inflation and labor market data will be scrutinized, and any new developments or persistent cooling in the labor market could prompt the Fed to consider easing policy restrictions.
4.5% to 4.75%: 5% chance of rising inflation prompting a shift in Fed policy.
4.25% to 4.5%: 60% chance the Fed remains cautious as Trump’s policies take shape.
4% to 4.25%: 35% chance of continued easing due to inflation approaching targets or a cooling labor market.
The team anticipates that the Fed will likely cut rates by 25 basis points before June 2025, potentially in May or June, bringing the benchmark rate down to 4-4.25%. However, the closer this core scenario gets to June, the higher the risk that the Fed may abandon rate cuts. This is due to two reasons: first, the Republican dominance in Congress and the White House may enable aggressive fiscal expansion that could pressure the Fed to maintain higher rates; second, some policymakers have indicated that monetary policy might not be as tight as currently estimated, given rising neutral rates.
Rate Probabilities for June:
4.25% to 4.75%: 30% chance of inflationary policies leading to slow normalization of rates.
4% to 4.25%: 50% chance of a rate cut due to fiscal expansion offsetting anti-inflation efforts.
3.5% to 4%: 10% chance of further cuts due to a sharp economic downturn.
By December 2025, the Monetary Policy Radar team predicts the Fed will have cut rates twice, each by 25 basis points, leading to a target range of 3.75-4%. This aligns with previous forecasts and the Fed's median projections from the economic summary in December 2024.
The core assumption is that Trump will implement most of his proposals, but significant uncertainty remains regarding their actual economic impact. If Trump significantly scales back his economic agenda, rate cuts could occur more rapidly. Conversely, if he accelerates tariffs or immigration enforcement, the Fed's easing will likely lag behind expectations.
4% to 4.75%: 35% chance of slow normalization due to the new administration's expansionary policies.
3.75% to 4%: 40% chance of gradual normalization as expansionary policies do not fully counter deflationary trends.
3% to 3.75%: 15% chance of accelerated cuts due to economic weakness.
Long-Term Neutral Rate Projections
The team maintains its long-term neutral rate forecast at approximately 3.25%.
Rate Probabilities:
4% to 5%: 20% chance of strong growth or declining confidence in U.S. public finances necessitating a higher neutral rate.
2.5% to 4%: 40% chance of a neutral rate aligning with the long-term growth rate plus inflation.
1.5% to 2.5%: 20% chance of weak growth leading to lower long-term neutral rates.
In conclusion, the Federal Reserve's future rate decisions will heavily depend on the evolving economic landscape influenced by Trump's policies and their actual impact on inflation and growth.
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