Fed’s Hawkish Tone Expected to Intensify in 2025
As the Federal Reserve continues to grapple with persistent inflation, its tone is likely to become even more hawkish in 2025. The upcoming change in the Fed’s rate-setting committee could reinforce this cautious approach, which was hinted at in the central bank’s recent decision to cut rates for the third consecutive meeting.
New Faces, New Perspectives
The Federal Open Market Committee (FOMC), a 12-person body that determines interest rates, will undergo a significant transformation in January. Four new regional Fed presidents will gain voting power, replacing outgoing members from Cleveland, Richmond, Atlanta, and San Francisco. These new members, including Austan Goolsbee, Susan Collins, Alberto Musalem, and Jeff Schmid, could tip the balance of the committee towards a more hawkish stance.
Hawkish Voices Gain Prominence
While Goolsbee is considered dovish, Collins tends to be neutral. However, Schmid and Musalem have made headlines with their hawkish comments on interest rates. Schmid believes rates could settle “well above” pre-pandemic levels, while Musalem advocates for a more “patient” approach to rate-setting. Their voices could amplify the Fed’s cautionary tone in 2025.
Updated Projections Reflect Caution
The Fed’s updated projections released on Wednesday show a median estimate of two rate cuts in 2025, down from four previously. Four officials predict no cuts next year, citing concerns over stubborn inflation. The Fed now expects inflation to finish next year at an elevated 2.5%, above its target of 2%.
Navigating Uncertainty
Fed officials are navigating a complex landscape, with President-elect Donald Trump’s proposed tax cuts and tariffs adding to policy uncertainty. As inflation remains above target, the Fed may exercise further caution in cutting rates. Chair Jerome Powell acknowledged that some policymakers are already incorporating the potential economic effects of these policies into their forecasts.
Experts Weigh In
EY chief economist Greg Daco expects inflation to moderate in early 2025 but warns that deregulation, immigration restrictions, and tariffs could reignite inflation pressures. As a result, policymakers may slow the recalibration process and navigate upside risks to inflation.
The Fed’s hawkish tone is likely to intensify in 2025, driven by new voices on the FOMC and persistent inflation concerns. As the central bank navigates uncertainty, its cautious approach could have significant implications for interest rates and the broader economy.
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