Monetary policy in 2025 remains unclear as the Federal Reserve will deal with still-sticky inflation and the uncertainties from policy in a second Donald Trump administration, analysts said. As such, projections for rate cuts range from one to four.
"It's going to be a tough balancing act," said Steve Skancke, chief economic advisor at Keel Point. "They want to have full employment, they want to contain inflation, and certainly, certainly, the imposition of tariffs will contribute to inflation, both with the immediate price increase and with the disruption of supply chains."
Still, he sees tariffs as "the stick" since in his first presidency, Trump tried "the carrot," which did not work to get cooperation from some nations. As for Mexico, Skancke said, "I think it will be effective, because a 25% tariff on goods coming from Mexico would put them in a recession. It would crush their economy. And so, they'll get with the program."
Still, he sees 100 basis points of rate cuts in 2025 (a prediction made before the newest Summary of Economic Projections calling for two cuts was released).
And while Fed Chair Jerome Powell will finish his term, Skancke said, "I'd be really surprised" if he's renominated. "I also don't think that Powell would want to do it again," he added. "Eight years is a long time … And Trump is just going to be abusive going forward."
Brian Rehling, head of global fixed-income strategy at Wells Fargo Investment Institute, agreed. "I think it's pretty clear that at least at this point, President-elect Trump will let Powell complete his term. I would be surprised however if Powell is renominated."
Rehling sees one 25 basis point rate cut next year (also speaking before the latest SEP), and expects the Fed's importance to the market will "diminish" in 2025. Wells Fargo expects inflation will be higher and the economy will be better, leaving little reason for rate cuts.
Wells Fargo Investment Institute President Darrell Cronk said President-elect Trump's proposed tariffs will be a negotiating tactic. "You should take President-elect Trump seriously, but not literally," Cronk said.
Ryan Swift, U.S. bond strategist at BCA Research, expects more than two rate cuts in 2025 since the Fed's "2025 median inflation forecast looks too high and its 2025 median unemployment rate forecast looks too low."
The Fed projections suggest it will cut rates by 50 basis points while core inflation is tracking toward 2.5% and the unemployment rate is tracking toward 4.3%, so "it is safe to assume that more cuts will be warranted if inflation moves below 2.5% and the unemployment rate moves above 4.3%," he said.
Swift "certainly" sees a pause in January, but "wouldn't rule out a 25-basis-point rate cut in March. There will be two more PCE inflation prints between now and the March FOMC meeting, and we expect the Fed will cut rates if they average 0.2% or lower."
How will tariffs impact? "Tariffs have the potential to send core inflation higher for a few months as the prices of impacted goods adjust," he said. "However, this temporary increase in inflation is more than offset in the subsequent months because of the large drag on manufacturing activity."
After the SEP was released, Brian Rose, senior U.S. economist at UBS Global Wealth Management, said he adjusted the firm's rate cut forecast in line with the new dot plot. "We now look for 25bps cuts in only June and September next year, or 50bps total for the year, rather than our previous expectation of one cut in each quarter for a total of 100bps," he said.
Bad news on the labor front in early 2025 could put a March rate cut back on the table, he said.
D.A. Davidson Director of Wealth Management Research James Ragan said, "I think two cuts is still possible," depending on data. "I think the Fed still wants to cut next year and [I] believe that it can" since inflation numbers will improve. The base case is two cuts, Ragan said, but fewer are possible if data don't support two moves.
While inflation will continue to trend lower in 2025, hitting 2% next year would be an "optimistic forecast," he added.
In her 2025 outlook, Seema Shah, chief global strategist at Principal Asset Management, said, "The central bank will likely become increasingly cautious about its easing path. The key implication of all this is that, come early 2025, rather than reducing policy rates at each meeting, the Fed is likely to slow its cutting pace to every other meeting — with some risk that rates don't fall as far as either the Fed or the market initially envisioned."
Further, she noted, "Unfortunately, interest rate relief will likely be shallow and restricted for U.S. pockets of weakness, exacerbating the bifurcated U.S. economy."
University of Central Florida economist Sean Snaith expects fewer cuts in 2025. The December rate cut was more about the Fed's credibility than data, he said.
Subadra Rajappa, Societe Generale head of U.S. rates strategy, said, "The strong job market and sticky inflation argue for a more cautious and data-dependent approach to policy in 2025."
Societe Generale expects four 25 basis point cuts next year, but Rajappa said, "it is hard to argue that the market, which is currently pricing in just two 25bp cuts next year, is underpricing cuts."
Growth may slow in 2025, but inflation should remain sticky, Rajappa said, "especially as the focus shifts to tariffs and immigration with the incoming administration."
The BNP Paribas 360 Markets team said, "Uncertainty and the return of inflationary pressures in the second half of 2025 look set to keep the U.S. Federal Reserve on hold throughout 2025."
