DWS: Expect Fed to slow down rate cut after December meeting, future fiscal and trade policy remain major unknowns
1min read DWS chief US economist Christian Scherrmann comments on the US FOMC meeting in December that the recent US economic data has been mixed, with the labor market seemingly weakening in the volatility, while inflation remains stubborn. The latest November consumer price index (CPI) came in as expected, showing continued deceleration but with a clear weakening in momentum over the past few months. Despite this, progress in containing inflation has been made, and further rate cuts remain possible, but the Fed is expected to slow its pace of rate cuts after the December meeting. Besides, future fiscal and trade policies remain major unknowns.
Fed Chair Powell made it clear in the last meeting not to over-guess or expect, but at least to consider the extension of the Tax Cuts and Jobs Act provisions in the future outlook. Unlike other policy proposals (such as tax cuts, tariffs or immigration), lawmakers seem to have reached some consensus on extending existing stimulus. Therefore, households and businesses may expect stronger domestic demand, and thus may increase hiring or maintain existing consumption.
The Fed will signal the need for a longer time to bring rates down to neutral (expected between 3% and 3.5%). Therefore, the economic forecast summary to be released by the Fed is expected to show strong economic growth to continue in 2025, but with fewer rate cuts and slightly higher inflation. DWS has lowered its forecast for rate cuts before the end of 2025 from five to three (including one in December). In terms of timing, the Fed is expected to switch to adjusting rates quarterly in the first half of 2025, and then pause the normalization of its policy in the second half.
