Economic Uncertainty Looms as Interest Rate Expectations Shift
As the world grapples with the uncertainty of fiscal policy and persistent inflation, experts are reevaluating their expectations for interest rate cuts. Despite the Federal Reserve’s recent forecasts and futures markets expectations, a significant number of respondents believe the central bank will ease this year, but with a more cautious approach.
A Shift in Expectations
Sixty-five percent of respondents predict two rate cuts in 2025, down from 78% in the previous survey. Meanwhile, 61% forecast at least one cut in 2026, a decrease from 70% in December. This shift in expectations is attributed to the uncertainty surrounding Trump’s tariff and tax policies.
The Fed’s Dilemma
The fed funds rate is expected to end the year at 3.96%, 12 basis points higher than previously predicted. The terminal rate, or the long-run nominal rate, has also edged up to 3.4%. This increase is attributed to the decline in the probability of recession, rising inflation forecasts, and mixed views on the inflationary and growth effects of the new administration’s policies.
Tariffs and Immigration: A Double-Edged Sword
President Trump’s signature economic policies have received mixed reviews from survey respondents. Tariffs and immigration are seen as boosting inflation and reducing growth, while deregulation and tax cuts are viewed as positive for growth and either neutral or positive for reducing inflation.
Regulatory Relief: A Key Driver of Growth
Despite the uncertainty, some experts believe that regulatory relief will be a core feature of the incoming administration’s plans and will drive economic activity. Others argue that tariffs and reductions in immigration will diminish the economy and potentially undermine it.
Inflation and Growth Forecasts
The 12-month outlook for the consumer price index has nudged up to 2.7% for this year, while forecasts for GDP have edged higher to 2.4% for 2025. The probability of a recession in the next 12 months has dropped to 23%, from 29%.
Tariffs and the Fed’s Independence
Majorities believe that tariffs on Mexico and Canada will depend on negotiations, while additional tariffs will be placed on China irrespective of negotiations. Trump’s recent comments have also raised concerns about the Fed’s independence, with only 36% believing he will respect it.
A Test of Fed Independence
As nominal growth might surprise on the upside, potentially putting the Fed officially on hold or even forcing them to raise rates, a fight between the president and the Fed could ensue. However, some experts believe the Fed will stand steadfast to political influence and pause its easing cycle.
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