MNI: Fed SEP Likely To Show Three Cuts For 2025 - Ex-Officials
MNI (WASHINGTON) - The Federal Reserve is likely to shave at least a quarter point and perhaps 50 basis points off its earlier projected interest rate reductions for 2025 this week, but the uncertainty attached to December’s projections is higher than usual as the Republicans prepare to take control of Congress and the White House, former Fed officials and staffers told MNI.
“There will be enough people on the committee who will revise down their cuts for 2025 that will pull it down to three as the median,” said Dennis Lockhart, former president of the Atlanta Fed. “I see this SEP as more of a pro forma projection, ignoring many of the contingencies in 2025, and in that respect it’ll serve as a reference point as the committee navigates 2025. They can’t yet anticipate the effect of the administration’s policies, yet clearly there will be an effect.”
A string of recent data have pointed to robust economic growth and also somewhat stickier price pressures, the former officials said.
“I do think it'll be shallower -- two or three rate cuts instead of four, it seems likeliest to me,” said William English, former director of the division of monetary affairs at the Fed’s board of governors.
The wide band of uncertainty reflects divergent views about how much the economic policy outlook will change next year under a new administration – and how much those changes will affect the path of Fed policy. (See MNI INTERVIEW: US 2025 Inflation Likely Higher-Ex-Fed's Koenig)
“I expect the SEP to show one fewer cut for 2025 – so three cuts rather than four,” said Ellen Meade, a former special adviser to the Fed board. “They may actually end up with fewer than three, but the prudent thing to do right now I think is to just go down by one given all the uncertainties. An uneven number of cuts has the benefit that it can't be precisely fit into a regular pattern, which is something that seems part of the messaging right now.”
CAUTIOUS REASSESSMENT
Given the recent strength, the Fed is likely to revise up growth and inflation forecasts for end-2025 from September’s projected 2% for GDP and core PCE of 2.2%.
But FOMC members will shy away from any drastic hawkish shifts that appear to preempt President-elect Donald Trump’s proposed policies like tariffs and immigration restrictions, which many believe will be inflationary, the ex-Fed members and senior staffers said.
"The prevailing narrative that seems to shape the SEP hasn’t changed that much – some further gradual softening in the labor market and inflation on a gradual glide path to 2%,” John Weinberg, former research director of the Richmond Fed, told MNI. (See MNI POLICY: Fed Leans Into Prospect Of Productivity Upgrade)
“Some of the more salient risks to the projected path involve possible actions by the new administration. But I think at this point these are too speculative to affect the central tendency of people’s forecasts or beliefs about the near-term appropriate stance of policy."
For instance, while Trump has threatened to impose major tariffs on imports from China, Canada and Mexico, there are doubts as to how much of this is a negotiating tactic that will be toned down once the president takes office.
In addition, there is considerable uncertainty about how any tariffs that are put into place would play out. If there were little retaliation, they might be seen as a one-time shock and increase in the price level that the central bank can and should look through.
“I don't think they will signal really much at all about what you think is likely to happen under the new administration next year and what might be required, although I do think that is definitely on their radar,” said Jeff Fuhrer, former research director at the Boston Fed.