Fed likely to delay rate cuts until next quarter

February 11, 2025 (MLN): Faced with the threat of rising inflation, the U.S. Federal Reserve will wait until next quarter before cutting rates again, according to most economists in a Reuters poll who previously expected a March cut.

Economists have raised their inflation forecasts since U.S. President Donald Trump was elected, based on concerns his policies, particularly on tariffs, could re-ignite price pressures in the economy.

After cutting rates by a cumulative 100 basis points between September and December, Fed officials, including Chair Jerome Powell, have recently said they are "not in a hurry" to lower rates further.

With a strong job market and still solid consumer spending, many economists see the world's largest economy in a sweet spot, with little need for lower rates.

So far, there have been new tariff announcements every week, as Reuters reported.

Trump said on Sunday he would impose new 25% tariffs on all steel and aluminium imports.

The White House delayed its plan to increase trade barriers on Mexico and Canada until March 1 but has levied an additional 10% tariff on imports from China.

"The tariffs are inflationary and could be quite negative for economic growth as well.

That uncertainty just means the Fed is sort of left waiting and wanting to see what does happen," said James Knightley, chief international economist at ING.

"There's lots and lots of moving parts to the policy thrust of Donald Trump, and some of them are somewhat contradictory.

It's very, very challenging, and so confidence in any of our forecasts around the U.S. economy, and by extension global economic activity, is pretty low right now."

While a near-60% majority of economists in a January poll had expected the central bank to reduce rates in March, they were divided in the February 4-10 poll on when the Fed will cut next. 

Two-thirds majority of forecasters, 67 of 101, expected at least one rate cut by end-June with 22 saying March and 45 in the second quarter.

Only 17 of 99 economists with end-2025 forecasts said the next cut will come in the second half of the year, and 16 expected no cuts this year.

Interest rate futures are pricing in just over a 50% probability of one rate cut by mid-2025.

Although poll medians predict the Fed will lower rates twice this year, reaching 3.75%-4.00% by end-2025, the range of forecasts is wide, from a low of 3.00%-3.25% and a high of 4.50%-4.75%.

There is no majority view. 

But economists were more certain about inflation pressures.

Over 90% of common contributors between the October survey conducted just before the U.S. presidential election and the latest poll raised their 2025 annual inflation forecast, by around 40 basis points on average.

Nearly 60% of respondents, 27 of 46, who answered an additional question said U.S. inflation risks from tariffs have gone up recently.

A further 17 said no change, with only two saying they had gone down.

"The uncertainty is likely enough to keep Fed officials on the sidelines over the coming months, and if high tariffs are ultimately imposed then the subsequent rise in inflation will prevent further easing over the remainder of 2025," noted Neil Shearing, group chief economist at Capital Economics.  

After growing an annualized 2.3% last quarter, the U.S. economy will expand 2.2% this year and 2.0% in 2026, faster than what Fed officials currently see as the non-inflationary growth rate of 1.8% over coming years, poll medians found.

The unemployment rate, which ticked down to 4% last month, was forecast at 4.2% this year and 4.1% next.

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