DWS: Based on policy uncertainty, it is expected that the Federal Reserve will cut interest rates again in March next year

According to the Zhitong Finance APP, Christian Scherrmann, Chief U.S. Economist at DWS, stated that the Federal Reserve's last interest rate meeting of the year will lower the policy rate by 25 basis points, in line with market expectations, with the new target range set at 4.25% to 4.5%. The latest median economic forecast reflects that there may only be two rate cuts in 2025, significantly lower than the previously expected four, which aligns with DWS's recent predictions. Federal Reserve Chairman Jerome Powell admitted at a press conference that there was considerable disagreement regarding this rate cut decision and indicated that inflation is showing a "stubborn" trend. This statement may suggest that if the anti-inflation process stalls, the Federal Reserve may choose to wait and see. Powell noted that political uncertainty has weakened some decision-makers' confidence in the sustained easing of inflation. DWS expects that due to policy uncertainty, the Federal Reserve may choose to skip the January meeting next year and will not cut rates again untilMarchnext year.

Christian Scherrmann pointed out that the forecast adjustment mainly reflects the market's slightly higher expectations for inflation next year, with the core personal consumption expenditure inflation rate raised from the original 2.2% to 2.5%, while the economic growth and unemployment rate forecasts remain largely unchanged and are also in line with expectations. The long-term neutral interest rate estimate remains at 3%, within DWS's forecast range of 3% to 3.5%. In terms of short-term forward guidance, the post-meeting statement has become more hawkish, removing the word "additional" and adding "magnitude and timing" as considerations for determining the next steps, indicating a slowdown in future rate cuts.

Regarding the potential impact of tariffs, Powell referenced an analysis from 2018 as a basis, mentioning that under certain circumstances, central banks may take a non-interventionist stance on one-time price changes. However, he also indicated that due to the lack of specific content and the current economic environment being different, the impact of tariffs on monetary policy may differ from that of previous years. Despite the many uncertainties, Powell still believes that the trend of easing inflation remains unchanged, primarily due to a cooling labor market, which will not create upward pressure on prices.

Overall, DWS is increasingly confident that the Federal Reserve will need a long time to bring rates down to neutral levels. However, in the face of rising political uncertainty, we must remain vigilant. Tariffs are generally considered one-time price changes and will naturally dissipate from inflation data after 12 months. However, some economic forecasting models indicate that tariffs may have a negative impact on demand and the labor market. On the other hand, past experiences show that fiscal stimulus and a decline in labor supply can indeed exacerbate price pressures. How these competing effects will ultimately evolve remains highly uncertain