The Possibility for Fed Rate Cuts in 2025 Reduced Given the Likely Rise in Inflation

After the Federal Reserve (Fed) cut the rates as expected in November, data show that market research institutions have cut their expectations for a significant Fed rate cut in December. Up to now, the probability of a 25 basis point cut has been expected to be 65% rather than 83% a week ago. Financial institutions that adjusted their rate forecasts all proclaimed that the Fed may change the rate cut trend to prepare for the possible increased inflation resulting from tighter restrictions on immigration and higher import tariffs which the elected administration could impose in 2025.

 

 

 

 

 

TD Bank expected the Fed to pause on rate cuts as it assesses the likely impact of new policies on inflation and economic growth. So, it estimated the Fed would keep rates steady between January and July in 2025. By contrast, Barclays Bank, raised US inflation expectations for 2025, predicting that the Fed will cut rates two times in 2025 rather than 3 times as previously estimated.

 

 

While the rates were fallen as expected the US Senator Mike Lee, a Utah Republican, sent an appeal on social media seconded by Tesla CEO Musk, calling on the Fed to follow the orders of the president-elect. This last week’s appeal reflects the next administration may challenge the Fed's independence--the central bank's ability to set monetary policy solely based on the future health of the US economy.

 

 

 

 

However, On October 7, Fed Chairman Jerome Powell had claimed that even if the new government asked him to resign, he would not do so because the law does not allow it. This signaled a potentially disputed relationship between the Fed chairman and the president-elect.

 

 

Regarding the fed rate outlook, DoubleLine Capital CEO Jeffrey Gonzalez warned that if the new US government cast off financial restrictions, the US fiscal deficit and the national debt will increase significantly, pushing up long-term interest rates, which obstructed the Fed’s policy formation.

 

 

 

“US interest rates may remain high for longer and low interest rates do not fit this era” is what CICC predicted in its latest research report. Given that the new U.S. government policies became an important variable affecting 2025, CICC believed that the space where the Fed continued cutting interest rates would be shrank. And the US federal funds rate may be lowered to 3.75% - 4% and then stopped there. This figure is about 150 basis points higher than the neutral rate before the pandemic, exceeding the current market consensus expectations.

 

 

Famous investor Stanley Druckenmiller also pointed out that if the Fed underestimates the persistence of inflation and continues to adopt a loose policy, it may affect the stability of the economy in the medium to long term. He believed that Powell should pay more attention to the long-term stability of the economy rather than short-term growth targets.

 

 

Earlier, Paul Tudor Jones, a legendary US investor and billionaire hedge fund manager, said he had readjusted his portfolio towards more inflationary trades. He is holding gold, bitcoin, and commodities to hedge against inflationary risk. Jones predicted that the next president would have to address the expanding debt or there could be a sell-off in the bond market, at which point the 10-year Treasury yield may rise further.