What is the prospect of the Fed cutting interest rates in 2025? Trump's policies still impose significant uncertainty.

Understanding that, currently, the Federal Reserve may need to see the impact of a series of economic policies, including import tariffs, by President-elect Donald Trump before raising predictions for inflation and interest rate changes in the first half of next year. Although recent inflation expectations have been raised and the new government's "highly conditional estimate of policy economic impact" has been cited, the Federal Reserve cut the benchmark federal funds rate to 4.375% last week for the third consecutive rate cut. Considering the new economic realities, which may include massive spending cuts, significant changes in immigration policy, and levying a series of tariffs on imported goods, the Federal Reserve also halved its rate cut expectations for 2025. Market currently expects only two rate cuts in the next 12 months. Federal Reserve Chairman Powell told reporters last week, "The slower pace of rate cuts next year does reflect this year's rising inflation data and the expectation that inflation will continue to rise." He said, "I think our actual cuts next year won't be driven by anything we cut today. We will react to the data; this is just the overall sense that the (Federal Open Market Committee) believes might be appropriate." Uncertainty surrounds Trump's tariff plans However, this response may take time to evolve, as the President-elect may not be able to impose the tariffs he has proposed, and the response from America's trading partners has not been fully communicated. Current legislation allows the President to impose targeted tariffs based on national security risks, but comprehensive tariffs must be approved by Congressional lawmakers. According to data from the Pew Research Center, the Republican Party holds only a five-seat majority in the upcoming House, the least in modern history, and may lose three seats in special elections in the first half of the year. Meanwhile, imposing tariffs on goods from Mexico and Canada may violate the trade agreement Trump negotiated in 2020, and face significant legal obstacles. Likewise on the spending side, the President-elect has proposed numerous unfunded tax cuts, and just last week, he failed to successfully pressure Congress to extend or cancel the debt ceiling. Patrick Welton, founder and chief investment officer of Welton Investment Partners, said, "Investors should expect a rapid implementation of tariffs, small cuts in government spending, and broad delays in tax policies in the first quarter of next year." "But are the tariffs long term or just something to bring to the negotiating table? he added. Trump's tax and spending plans also carry similar uncertainties. Congressional spending debates House members have passed a temporary budget agreement despite the President-elect's remarks. They must balance external pressures from agents such as Elon Musk, charged with determining billions in federal spending from the budget, and political needs to fulfill campaign promises. Samuel Tombs of Pantheon Macroeconomics said, "(Last week) 34 House Republicans rejected a trim-down funding bill - even after a two-year pause in the debt ceiling was lifted - signaling that Trump will have a hard time finding enough support next year to support tax cuts without spending cuts." He added, "Fiscal neutral schemes that fund tax cuts by reducing federal employment and shrinking welfare payments will hit consumer demand." Slowing consumer demand, coupled with the inflationary impact of tariffs, may not only disrupt the growth trajectory of the world's largest economy but also prevent the Federal Reserve from making decisive interest rate moves for a long period in the second half of next year. Currently, the FedWatch tool from the Chicago Mercantile Exchange Group sees the probability of a rate cut in May by the Fed as likely as flipping a coin, with slightly higher chances in June. Meanwhile, U.S. Treasury yields continue to rise, with the 2-year bond yield at 4.321%, just below the current federal funds rate, despite lower-than-expected inflation data released last week. Is the Fed leaning dovish on rates? Gregory Daco, chief economist at Aon, said, "In contrast to Powell's previous statements, the Federal Reserve does not 'speculate, guess, or assume' specific policy developments. There is a stronger inflation forecast for 2025, with no corresponding changes in GDP and unemployment rate predictions, indicating that some policymakers are indeed considering potential changes in regulation, immigration, trade, and tax policies." However, Daco said that when the Federal Reserve reexamines its rate forecasts in the spring, a more cautious outlook may emerge. He said, "Despite unusually high economic uncertainty, we stress that the consensus for a strong inflation surge in early 2025 seems dubious." "Given the high dependence on data, it would not be surprising if the Fed's rate cut expectations are raised in 3 months."