Fed likely to slow rate cuts in 2025: Experts

ISTANBUL

The US Federal Reserve may slow its rate cut cycle next year and adopt a more cautious approach as President-elect Donald Trump assumes office in January, experts suggest.

Bernd Weidensteiner, US economist at Commerzbank, told Anadolu that the US economy has outperformed expectations this year, successfully navigating sharp rate hikes up until mid-2023.

“It is important for (the US economy) to safeguard what it has achieved, (as) the Fed's goal was to ‘cool’ the labor market, since an overheated labor market would make it more difficult to achieve the inflation target,” said Weidensteiner.

He noted that approximately 150,000 new jobs have been created monthly this year, accounting for short-term special factors like storms and strikes, while the unemployment rate has risen “slowly but steadily” to 4.2% in November, half a percentage point higher than a year ago.

Weidensteiner stressed that the Fed must weigh the risks of further rate cuts, which could complicate efforts to bring inflation down to target levels.

He pointed out that inflation has not slowed significantly in recent months, with core inflation holding within a narrow range of 2.6%–2.8% over the past six months, while the country’s recently announced consumer price index (CPI) has also remained above 2%.

Weidensteiner projected that the Fed will likely reduce its policy rate by 25 basis points at its December meeting, as market expectations align with this move, and the Bank is “unlikely to want to spring a surprise.” However, it remains uncertain whether more cuts will follow early next year, as the Fed may either slow the pace or pause rate cuts entirely, depending on incoming data.

He added that the updated “dot plot” could shed light on the Fed’s current stance on monetary policy.

“Based on the September version, the Fed’s presidents and governors expected further interest rate cuts totaling 100 basis points in 2025; in light of the data from recent months, they could take a step back here and delete at least one 25 bp cut,” he explained.

James Knightley, chief international economist at ING, told Anadolu that the Fed is anticipated to implement another 25-basis-point cut and “continue to move policy from restrictive territory to somewhere closer to neutral.”

Knightley noted that with inflation remaining sticky and Trump’s focus on boosting US growth, the Fed is expected to take a more cautious approach to policy easing next year.

“Trump’s policy thrust of immigration controls, tariffs and personal and corporate tax cuts likely to mean the Fed signals a shallower, slower path of easing through 2025,” he said.

“The risk of slightly stronger near-term growth, coupled with the threat of higher inflation – tariffs raising the prices of goods and immigration controls potentially increasing wages and costs in sectors like agriculture, construction, and hospitality – means we expect them to signal only three rate cuts in 2025,” Knightley added.

He said the Fed will likely have a “clearer understanding” of Trump’s tariff, tax, and spending plans by the Federal Open Market Committee (FOMC) meeting in March, leaving significant forecast revisions until then.

Philip Marey, senior US strategist at Rabobank, told Anadolu that he anticipates a “hawkish cut” in December – a 25-basis-point cut – which will signal that the FOMC intends to slow rate cuts next year, “both in the dot plot and the press conference, (but) we will expect only one rate cut of 25 bps in 2025.”

Marey suggested that the Fed will likely pause its rate cut cycle during 2025 as “a rebound in inflation” is anticipated, driven by Trump’s additional tariffs.

*Writing by Emir Yildirim