Deutsche Bank's chief US economist, Matthew Luzzetti, predicts that the Federal Reserve will halt interest rate cuts after a final quarter-point reduction in December and maintain this stance throughout 2025. Luzzetti points to a strong economy and the inflationary impact of President Trump's policies as factors that will offset the need for further rate cuts.
Luzzetti highlights the resilience of the US economy, citing ongoing consumer strength and better-than-expected job data as indicators that a slowdown is not imminent. Additionally, inflation remains above the Fed's 2% target rate, with the consumer price index increasing by 2.6% in October.
The economist believes that President-elect Trump's policy mix, including tax cuts and protectionist trade plans, will keep inflation above 2.5%. Trump's tariffs on goods from China, Mexico, and Canada are expected to further accelerate price growth, leading to higher inflation.
Luzzetti suggests that the Fed will begin factoring in White House policy during its December meeting, with these considerations influencing decision-making in future meetings. He anticipates that Trump's policies will push the neutral rate closer to 4%, compared to the current Fed funds rate of 4.50%-4.75%.
On the other hand, Goldman Sachs predicts larger interest rate cuts in 2025, expecting the Fed funds rate to drop to 3.25%-3.5% by the end of the year due to the impact of Trump's tariffs on economic growth. Citi, on the other hand, foresees a significant 50 basis point cut in December, citing emerging labor market weaknesses in the data.
Overall, while Deutsche Bank anticipates a pause in interest rate cuts by the Federal Reserve, other institutions like Goldman Sachs and Citi have different outlooks on the future trajectory of interest rates based on varying assessments of economic conditions and policy impacts.