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The Federal Reserve will be more cautious about cutting interest rates amid concerns that the Trump administration’s policies could stoke inflation, according to an academic economist interviewed by the Financial Times.
Economists surveyed between December 11 and 13 increased their forecasts for next year’s federal funds rate compared to the previous FT-Chicago Booth survey in September. The vast majority expected the figure to be at 3.5 percent or higher by the end of 2025, while most respondents in September said it would likely fall below 3.5 percent by that point.
If the Fed makes a quarter-point cut at its meeting next week, as expected, the key interest rate will be between 4.25 and 4.5 percent.
“In recent months, downside risks to the labor market have become somewhat less dire and progress on inflation appears to have stalled somewhat,” said Jonathan Wright, a former Fed economist now at Johns Hopkins University who is at the The survey contributed to the design.
“Inflation has come down more painlessly than I and most people expected, but I think we will still find that the final stretch (of reaching the target) will be a little more difficult and so this is certainly an unlikely environment for the Fed Hurry to cut interest rates,” Wright said.
Tara Sinclair, who previously worked at the Treasury Department and is now a professor at George Washington University, said this could even lead to the Fed taking a longer pause after a rate cut in December and keeping interest rates stable for the rest of next year .
“In my opinion they need to stay in restrictive territory until it is clear that inflation has returned to its target,” she added.
Officials are planning how quickly to reach a “neutral” interest rate that neither stimulates nor suppresses growth. They have spoken openly about slowing the pace of cuts as they approach that level, although Chairman Jay Powell has acknowledged that policymakers lack clarity on where that lies.
“We’re pretty sure it’s below where we are now,” he told reporters in November.
Of great importance for the political outlook is the return of Donald Trump to the White House next month. Trump has vowed to impose sweeping tariffs and deport millions of Americans while cutting taxes and regulations.
Just over 60 percent of the economists surveyed Opinion pollconducted in collaboration with the University of Chicago Booth School of Business, assumed that Trump’s plans would have a negative impact on US growth. Most also expect higher inflation if his plans to impose blanket tariffs and high levies on China go ahead.
These concerns are compounded at a time when concerns about price pressures remain.
Just over 80 percent of the 47 economists surveyed said inflation next year, as measured by the personal spending price index after food and energy prices are eliminated, will not fall below 2 percent until January 2026 or later. In September, only about 35 percent of respondents expressed this estimate.
The median estimate of core PCE inflation for the next 12 months also rose to 2.5 percent from 2.2 percent in the September survey.
Economists remained optimistic about the economic outlook, with the average estimate of real GDP growth rising to 2.3 percent from 2 percent in September. Fears of a recession were also far away: over half of those surveyed estimated that the next recession would not begin until the third quarter of 2026 at the earliest.
But in the longer term, Sinclair warned that Trump’s policies would begin to take effect.
“I clearly think this combination of measures is not good in the long term,” she said.
Economists warned that the Fed may also have problems navigating this period. They are prepared for a “confrontation” between the president-elect and Powell if the central bank is forced to keep interest rates elevated to counter the effects of Trump’s policies.
Wright said the Fed will be “more unsettled” about inflation than in the past given price pressures that have surged following the pandemic.
“In 2019, the Fed could afford to take the view: ‘We’re going to wait until we see the whites of inflation’s eyes,'” he said. “I don’t think the Fed will take that stance today.”
