- Several Fed officials have said it may be time for the Fed to scale back its pace of rate cuts, while economists predicted Trump’s proposed policies could change the Fed’s inflation calculations.
Experts expect the Fed to cut rates for a third time in January, but it may soon slow its pace as Fed officials point to stubborn inflation and uncertainty over the economic consequences of Trump’s proposed tariffs.
After cutting rates twice this year, 90% of economists are expecting a third, 25 basis-point rate cut in December, according to a poll by Reuters. A third rate cut would bring the Fed’s key benchmark rate down a full percentage point compared to September when it first started cutting rates, Bloombergreported. Most economists polled by Reuters also expected the Fed to pause its interest rate cuts in January and leave rates the same.
The economist survey comes as Fed officials have warned about the Fed’s pace of rate cuts since the last Federal Open Market Committee meeting in November.
Fed governor Michelle Bowman, who was the only one to vote against the 50 basis-point rate cut in September and the first since 2005 to vote against an interest rate decision, was among those advocating for a change in pace.
Bowman said in a speech on Nov. 20 that the Fed should move forward with caution.
“I would prefer to proceed cautiously in bringing the policy rate down to better assess how far we are from the end point, while recognizing that we have not yet achieved our inflation goal and closely watching the evolution of the labor market,” Bowman said.
Several other voting members of the FOMC, including Cleveland Fed president and CEO Beth Hammack and St. Louis Fed president Alberto Musalem both said in public remarks since November that it may be time to slow the pace of rate cuts, according to a research note by Goldman Sachs.
Some members also said it’s too soon to tell how President-elect Donald Trump’s fiscal policy changes, including tariffs, could affect the economy, “given the uncertainty about the timing and scope of these policies,” Goldman analysts wrote in the note.
Yet, Trump’s potential policies, including his proposal to levy a 10% general tariff on imports, could do much to change the economy and the Fed’s trajectory, including by bringing inflation up, experts say.
“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,” Kathy Bostjancic, the chief economist at Nationwide, told Bloomberg.
Other Fed officials, including Chicago Fed president and CEO Austan Goolsbee, have said interest rates could still fall significantly next year.
“I think over the next year, if conditions evolve the way they have been, and the way that I expect them to, rates are going to be a fair bit lower than where they are today,” said Goolsbe during an interview at the Chicago Fed’s Economic Outlook Symposium on Dec. 6.
The Fed kicked off its rate cut moves in September with a half-a-percentage-point cut. The move surprised some onlookers who expected a 25 basis-point cut. Some, such as, Yardeni Research President Ed Yardeni, have suggested the larger rate cut may have been a misstep.
Bowman at the time also warned that the bigger-than-expected cut was risky.
“I see the risk that the Committee’s larger policy action could be interpreted as a premature declaration of victory on our price stability mandate,” she said in a statement.