Fed exercises caution: Inflation and Trump influence future interest rate policy

The US Federal Reserve faces a challenging balancing act in its interest rate decision strategy. A recent survey of leading economists, conducted by the Financial Times in collaboration with the University of Chicago Booth, forecasts a more cautious approach by the Federal Reserve in cutting interest rates. The background to this assessment is concerns that the Trump administration's policies could fuel inflation. The predominantly academic economists have raised their forecasts for the key interest rate in the coming year. By the end of 2025, they mostly expect the rate to be at 3.5 percent or above. However, a possible quarter-percentage-point cut at the next Fed meeting could lower it to a range of 4.25 to 4.5 percent. Jonathan Wright, a former Fed economist and currently a professor at Johns Hopkins University, indicates that the inflation risk remains and achieving the inflation target poses some challenges. This could prompt the Fed to keep interest rates at a restrictive level for a longer period. Similarly, Tara Sinclair of George Washington University is considering a longer pause after a December cut. The discussion about the neutral interest rate, which neither stimulates nor restrains economic growth, remains another challenge for the Fed. Most of the surveyed economists view the future President Trump's economic plans, such as the introduction of comprehensive tariffs, as a growth risk for the US and anticipate additional inflationary pressure. Although no recession is feared for the coming year, the long-term consequences of the announced policies are worrying. Sinclair stated that Trump's strategies are harmful to the economy in the long run. The Fed must prepare for potential conflicts with the new government if high interest rates become necessary to control inflation. Economic experts emphasize that the Fed needs to react significantly more sensitively to inflation in the current situation, as the post-pandemic environment has led to increased price developments.