MNI: Fed SEP To Show 2 Or Fewer Cuts, Two-Sided Economy Risks
MNI (WASHINGTON) - Federal Reserve officials are seeing increased risks to both the inflation and employment sides of their mandate, likely leading them to pencil in just two rate cuts or fewer for 2025 this week while revising up their forecast for price pressures and curtailing growth expectations, ex-policymakers and staffers told MNI.
"I can imagine because of uncertainty and some tariff-driven upside inflation risk that a certain number of people shift to fewer than two cuts and some of the doves shift to two," said Dennis Lockhart, former president of the Atlanta Fed.
"It could be an increase in the number of dots at two, but I can also see a scenario where two cuts and one are evenly split."
In the last SEP in December, 10 officials favored two cuts, which was the median for 2025, and five penciled in more than two. (See MNI INTERVIEW: Fed Likely Pushing Back 2025 Cuts - Lockhart )
Ex-staff emphasized heightened uncertainty out of Washington, including volatility around the announcement of U.S. President Donald Trump's trade policies, as dampening the outlook for growth, but not by enough to override the central bank's lingering concern about inflation. Core PCE estimates for February are currently tracking what would be an 11-month high of 0.33%, while short-term inflation expectations have spiked in recent surveys. (See MNI INTERVIEW: Inflation Expectations Worrisome For Fed-UMich)
"They're very cautious in terms of moving forward, because we see sticky inflation. They haven't seen the progress they expected, especially on the service side," said Gianluca Benigno, former senior economist at the New York Fed.
WAIT-AND-SEE APPROACH
"It seems to me they're taking a wait-and-see approach. I tend to think they might shift toward one cut," he added, although he still personally believes the Fed will cut twice this year. (See MNI INTERVIEW: Fed Nearly Done Easing Barring Slump-Benigno)
Seth Carpenter, former Fed board economist, also thinks officials will mostly be sitting on the fence for now because of stubborn inflation numbers that he thinks will let up somewhat in the second quarter.
"I don't know how much the Summary of Economic Projections has to change," he said, because the inflationary effects of tariffs are not yet showing up in the data. "You could still see one or two rate cuts as the median for the dot plot. I think there will definitely be people that write down zero."
Carpenter himself believes the Fed will cut just once around mid-year before the inflationary effects of tariffs puts policymakers back on hold in the latter half of 2025. (See MNI INTERVIEW: Fed To Cut Just Once Due To Tariffs-Carpenter)
Former officials and staffers are also expecting some upward revisions in the Fed's SEP forecasts for inflation as well as downward revisions to the central bank's growth projections. The Fed in December saw the economy expanding 2.1% this year and headline PCE ending the year at 2.5%.