The Fed might not cut interest rates at all in 2025, Deutsche Bank economist says

Federal Reserve Bank Chair Jerome Powell announces that interest rates will remain unchanged during a news conference at the Federal Reserves’s William McChesney Martin building on June 12, 2024 in Washington, DC. Following the two-day Federal Open Markets Committee meeting Powell said the Fed has decided to keep their current rate range of 5.25-5.50 percent and signaled that it believes long-run rates will stay higher than previously indicated.

The Federal Reserve’s easing cycle is closer to stalling than starting, at least according to Deutsche Bank.

Chief US economist Matthew Luzzetti expects the central bank to pause interest rate cuts after a final quarter-point reduction in December.

“I think you’ll see that when the Fed updates their forecasts, the unemployment is going to come down, growth is going to come up, inflation is going to come up,” he told Bloomberg TV. “So that dynamic, I think, definitely supports the fed on a more extended pause.”

Luzzetti outlined two reasons supporting that dynamic.

First, the US economy doesn’t appear headed for an imminent slowdown, which dials back pressure on the Fed to prop up growth by lowering interest rates. Luzzetti cited ongoing consumer resilience and better-than-expected jobs data.

Second, inflation continues to hover above the 2% target rate. The consumer price index gained 2.6% in October, and investors will get a fresh update on inflation with the October personal consumption expenditures index due out on Wednesday.

While inflation is hovering above target, many on Wall Street are bracing for it to swing even higher under president-elect Donald Trump.

Luzzetti said Trump’s policy mix will keep inflation above 2.5% as tax cuts propel growth and spending while Trump’s protectionist trade plans could accelerate price growth.

Economists renewed their concerns about the prospect of higher inflation after the president-elect announced an extra 10% tariff rate on goods from China and a 25% duty on products from Mexico and Canada. Economists have said consumers are likely to bear the brunt of tariffs’ costs, with prices going up as companies look to offset the cost of imports.

Luzzetti expects that the Fed will start pricing in White House policy during its upcoming December meeting, though these considerations will likely be fully reflected in the Fed’s decision-making in later meetings.

In his view, Trump’s policies would push the neutral rate closer to 4%. The neutral rate is the rate that neither stimulates nor shrinks the economy. The Fed funds rate stands at 4.50%-4.75%.

Still, others see things differently. Earlier this month, Goldman Sachs projected that the Fed funds rate would drop to 3.25%-3.5% by the end of 2025 as Trump’s tariffs prompt a near-term drag on growth.

Meanwhile, Citi said that it still expects a jumbo 50 basis point cut in December, noting that labor market weakness is starting to show in data.