Is the market too optimistic? Economists warn: The Federal Reserve has paused interest rate cuts, and may only cut rates once this year!

In 2025, how will the Federal Reserve's easing policy unfold in the new year?

According to the views of prominent economists who attended the American Economic Association meeting in San Francisco last weekend, the Federal Reserve may adopt a wait-and-see attitude this year, with at most one interest rate cut.

Morgan Stanley's Chief U.S. Economist Ellen Zentner stated that Federal Reserve Chairman Jerome Powell and his colleagues signaled a "strong pause" during last month's meeting. In the policy statement at that time, the Federal Reserve indicated that it would review the economic situation when "considering the extent and timing of further adjustments."

Zentner believes this means "if we are to take any further action, we will let you know."

Limited Prospects for Rate Cuts This Year?

Harvard University professor and former senior economist in the Obama administration Jason Furman believes that if the labor market remains healthy, the Federal Reserve may only cut rates once this year. He pointed out that the Federal Reserve has shifted to a new phase where it needs "reasons" to cut rates, which is different from last year's view of "everything is fine, so let's cut rates."

Furman stated that if conditions remain unchanged, considering the inflation outlook and whether interest rates are in the optimal range that neither stimulates nor suppresses demand, there may be at most one 25 basis point rate cut. However, if the unemployment rate continues to rise, the Federal Reserve will adopt an easing policy.

Karen Dynan, a senior researcher at the Peterson Institute for International Economics and a Harvard University professor, expects three rate cuts this year. She believes the Federal Reserve hopes to prevent economic deterioration through moderate rate cuts.

Economists expect the economy to continue growing this year but also acknowledge significant risks, mainly from the policy plans of the new Trump administration. Dynan estimates that the probability of the economy staying on track this year is about 75%. She noted that the wealth effect from last year's stock market rise and the increase in consumer and business confidence will support the economy.

Furman anticipates a slight slowdown in economic growth this year, trending towards a growth rate of 1.5%-2%, lower than the expected growth rate of over 3% in the fourth quarter. He stated:

"There are many factors pushing the economy slightly in an unfavorable direction."

Furman cautioned that if the personal consumption expenditures price index inflation rate favored by the Federal Reserve returns to above 3% by mid-year, the Federal Reserve may consider changing its policy direction. Last November, the overall inflation rate was 2.4%.

It is worth noting that Furman does not rule out the possibility of interest rate hikes in 2025.

Risk Warning and Disclaimer

Markets are risky, and investments should be made cautiously. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investing based on this is at one's own risk