MNI INTERVIEW: Three Fed Cuts Before Mid-2025 Pause - Giannoni
MNI (WASHINGTON) - The Federal Reserve will alternate between interest-rate cuts and skips through June 2025 before a year-long pause as fresh tariffs and slower labor supply growth renew inflation pressures, former Dallas Fed research director Marc Giannoni told MNI.
He expects a cut at the December FOMC meeting and again in March and June. That will be followed by a pause for a year and then two more reductions in late 2026 taking the fed funds rate to a range of 3.25% to 3.5%.
"The Fed sees policy as being restrictive," said Giannoni, now chief U.S. economist for Barclays. "In that context, they will want to cut more."
Economic growth will slow gradually next year to a 2% pace in the first half and 1.5% in the second half, giving room for further rate cuts, he said. U.S. GDP has advanced at about a 3% pace in the second and third quarters of this year. (See: MNI INTERVIEW: US Services Activity Cools To Trend-ISM Chief)
JOB GAINS SLOWING
Giannoni's baseline is for job gains to increase by 275,000 in Friday's November labor report, absent any revisions for the prior month's numbers. That would be the fastest since March and a big jump from October's 12,000 jobs in a month disrupted by a Boeing strike and hurricanes.
"If we have something like 300,000 or so, then [the Fed] would seriously consider a pause, assuming no change in the rest of the release," he said. "Conversely, if we have a much weaker print in November, that's not offset by a strong upward revision in the October print, so that the three month moving average would come down weaker than 170,000, at that point a cut is is going to be much more likely than what it is priced in at this point."
Tighter immigration restrictions will slow the labor market next year, more than fading demand, according to Giannoni. "Supply is being squeezed in the face of a demand that is pretty strong from the consumer, in particular because the consumer in great financial shape," he said.
Monthly job gains will diminish to 125,000 in the first half of 2025, then 100,000 in the second half and then a bit further in 2026, he said. That will see the unemployment rate edge up in the short term from the current 4.1% before falling below 4% later next year.
TRUMP PROPOSALS
The Fed will pause rate cuts after June even with a softer economy, Giannoni said, as new tariffs from Donald Trump lift inflation before the economy sees a boost from extended tax cuts. He assumes Trump will impose tariffs of 5% across the board, 30% tariffs on China, bringing retaliation from other countries that slows U.S. exports.
"They will raise the price level, and even though the Fed will know that this is not necessarily permanently raising inflation, they will want to look through part of that, we think that they will not be cutting as inflation is picking up," Giannoni said. (See: MNI INTERVIEW: Ex-Fed's Blinder Sees Stagflation Shock Ahead)
The Republican sweep in the elections makes it more likely Trump extends and expands the Tax Cuts and Jobs Act of 2017 next year, but the economic boost won't be meaningful until after 2026, Giannoni said.
The median FOMC official in the September SEP saw four 25 basis point interest rate cuts by the end of 2025 to 3.4%. "It would make a lot of sense for them to show about two cuts next next year," said Giannoni. He assumes Fed staff won't yet incorporate Trump's immigration and tariff proposals into a fresh baseline projection in December.