The last meeting of the year of the Federal Reserve has confirmed a stronger upward revision than expected by analysts in interest rate expectations: The US central bank is adjusting expectations for economic growth, especially for this year, and also for inflation, and this leads them to project a roadmap with fewer interest rate cuts than expected until now. The Fed’s ‘dot plot’, which measures the interest rate forecasts maintained by the members of the Federal Open Market Committee, erases two rate cuts in its estimate for next year, and now only expects there to be two drops of 25 basis points in 2025, compared to the four that the organization expected in September.
The upward revision in the interest rate outlook is framed in a context in which the Fed is strongly increasing the inflation outlook for the coming years. The revision has been especially strong for the year 2025: If in September the Fed expected inflation at 2.1%, slightly above its objective, it now confirms that this scenario is very far from being achieved, since it increases it to 2.5%. Looking ahead to 2026, the estimate increases by one tenth, to 2.1%, and for 2027 it remains unchanged at 2%.
The revision of growth figures has not been so aggressive. For 2024, which is about to end, they increase the estimate by 5 tenths, up to 2.5%, but for 2025 they have only increased it by 1 tenth, leaving it at 2.1%. The forecast for 2026 remains as it was, at 1.9%, and for 2027 it is cut by one tenth, now remaining at 1.9%.
As for the new unemployment forecasts, they remain without too many changes, cutting the forecast for 2025 from 4.4% to 4.3%, and maintaining the 2026 estimate at the same level. For 2027 it increases by one tenth, to 4.3%, and in the long term it remains at 4.2%.
The rate cut expected for next year fits with a scenario in which inflation turns around and remains stronger than expected, and confirms that the Fed reacts based on its macroeconomic forecast table. With more inflation in 2025 and stronger growth, it is logical for the central bank to review its roadmap and expect a less aggressive rate cut process for the coming years.
In fact, there are analysts who already highlight the possibility that the Fed will have to raise rates in the medium term. This is the case of George Brown, senior US economist at Schroders, who points out how ““Faster growth is likely to ensure that inflation remains higher than we previously assumed and that, after further short-term easing, the Fed will end up raising rates again in 2026,” a scenario that, until now, was off the table. “So we expect consumer price index inflation to average 2.4% next year, up from 2.1% previously, before rising to 2.7% next year. 2026. This reflationary environment would not only limit the Fed’s room for maneuver, but would put the possibility of raising rates back on the table.”Brown confirms.
The impact of Trump’s policies
Have the policies that Donald Trump is expected to take had anything to do with the revision of the Fed members’ projections? This question was posed to Jerome Powell at the press conference, and the president of the central bank has greatly changed his usual speech.
Until now, Powell had insisted on several occasions that the Fed would not consider assumptions about economic policies that had not been fully confirmed, but now he confirms that “There have been members of the Fed who have incorporated estimates on fiscal policy, others have not, and others have not said whether they have included it or not”explains Powell. This is a significant change in message, and one that may have had a strong impact on the central bank’s macroeconomic projections.
In the first year of Donald Trump’s presidency, more and more analysts expect that monetary policy will suffer the consequences of the new president’s measures, especially due to the inflationary impact that these may have. Olu Sonola, head of US economic analysis at Fitch Ratings, highlights how “the Fed is recognizing the possibility of inflationary policies next year,” and highlights how “it is clear that the Fed is not so sure of the direction its monetary policy than it was three months ago. “We all need to be prepared for a bumpy road in monetary policy next year.”confirms Sonola.
The labor market remains strong
The Fed has a dual mandate, in which it must balance price stability and the fight to achieve full employment. In this sense, the labor market is not giving the signals that worried the central bank in the middle of the year, when Powell confirmed that the Fed’s new approach would focus on employment, and no longer so much on inflation, a turn that unleashed the start of the rate cut.
Now, Powell recognizes that, while inflation continues to converge with the target, and that monetary policy remains restrictive, “the labor market is not cooling at a pace that worries us,” an argument that is put against lowering rates aggressively and fits with the decision of Fed members to erase two rate cuts by 2025.
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