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The U.S. Federal Reserve will hold interest rates steady on Jan. 29 and resume cuts in March, according to a majority of economists polled by Reuters, as policymakers digest expectations of a new set of economic policies from Washington.
The latest survey, conducted a week before US President-elect Donald Trump’s inauguration on January 20, also suggests that prolonged inflationary pressure will only allow the Fed to lower interest rates once again.
Concerns about Trump’s promises, from sweeping tariffs to expanding tax cuts to deporting illegal immigrants, have contributed to a dramatic rise in US government bond yields before he took office.
The outlook for an already strong economy and the future path of the Fed’s interest rates will depend on how aggressive the incoming administration is in keeping those promises.
“If they deliver anything close to what they promised on rates, then we’ll probably see disinflationary pressures stall, where the Fed won’t cut,” said Jonathan Millar, senior U.S. economist at Barclays.
“At least, not as fast as it was last fall, but there’s also a chance they’ll be stuck for some time.”
Millar is one of the leading forecasters, opening a new tab for the US in a Reuters poll last year, according to LSEG StarMine calculations.
Since the Fed last lowered interest rates in December by a quarter of a percentage point, inflation has fallen and the job market experienced a boom in December, indicating that further economic stimulus may not be necessary in an economy that is already doing well.
A total of 103 economists in the survey predicted the Federal Open Market Committee (FOMC) would keep the key interest rate steady at 4.25%-4.50% at its January 28-29 meeting. Nearly 60% of economists, aged 61, expect the Fed to cut interest rates in March.
Nearly 65% of economists, 65 of 102, expect interest rate cuts two or more times this year. The figure differs from three or more views held by economists since August 2024.
The pricing of interest rate futures has reversed in recent weeks with the Fed’s only one rate cut this year and the possibility of a second rate cut falling short of expectations at least three months ago.
According to the poll, the fed funds rate will be 3.75%-4.00% by the end of 2025, much higher than the 3.00%-3.25% predicted a few months ago.
But the possibility of a prolonged lull is growing amid concerns that future policies, particularly hefty tariffs on the country’s biggest trading partners, could reignite inflationary pressures.
Although the poll median shows inflation will remain above the Fed’s target of 2% at least through 2027, most economists – 40 of 49 – say inflation will likely be higher than they expect this year, not lower.
“We expect the FOMC to be faced with rising inflation related to the new administration’s tariffs, immigration and fiscal policies,” said James Egelhof, chief U.S. economist at BNP Paribas.
“In the wake of high inflation resulting from the post-pandemic recovery, we saw an increasing risk that inflation above 2% would become embedded in the economy, so the FOMC took a more cautious path in managing this risk.”
The U.S. economy will grow by 2.2% this year and 2.0% in 2026, faster than what Fed officials currently see as a non-inflationary growth rate of 1.8% in the coming years, according to the poll.
However, the majority of respondents, 43 out of 49 respondents, said the possibility of an increase in the Fed’s interest rates was unlikely this year.
“Strong growth should add to inflationary pressures from tariffs and immigration restrictions, making another rate hike possible. But this should be more of a story for 2026, with a wait-and-see approach more appropriate this year,” said George Brown, senior US economist at Schroders.
Source: Reuters(Reporting by Indradip Ghosh; Polling by Purujit Arun and Aman Kumar Soni; Editing by Ross Finley and Toby Chopra)
