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DWS: Based on policy uncertainty, the Federal Reserve is expected to cut interest rates again in March next year.
DWS expects that due to policy uncertainty, the Federal Reserve may choose to skip the January meeting next year and decrease interest rates again in March.
Christian Scherrmann, Chief US Economist at the German company DWS, stated that the Federal Reserve lowered its policy rate by 25 basis points at its last meeting of the year, in line with market expectations. The new target range is 4.25% to 4.5%. The median of the latest economic forecasts reflects that there may only be two rate cuts in 2025, significantly lower than the previous expectation of four cuts, which aligns with DWS' recent forecast. Federal Reserve Chair Powell admitted during a press conference that there was significant disagreement over the rate cut decision and mentioned that inflation is trending sideways. This statement may suggest that if the progress against inflation stalls, the Federal Reserve may choose to wait and see. Powell pointed out that political uncertainty has weakened confidence in some policymakers' expectations for sustained moderation in inflation. Due to policy uncertainty, DWS expects that the Federal Reserve may skip the January meeting next year and cut rates again in March. Christian Scherrmann noted that the adjustments to the forecast mainly reflect slightly higher inflation expectations for next year, with the core personal consumption expenditure inflation rate revised upward from 2.2% to 2.5%. Economic growth and unemployment rate forecasts remain largely unchanged and are in line with expectations. The estimate for the long-term neutral interest rate remains at 3%, within DWS' range of 3% to 3.5%. In terms of forward guidance, the post-meeting statement has a more hawkish tone, removing the word "additional" and adding "magnitude and timing" as considerations for the next steps, implying a slower pace of future rate cuts. Regarding the potential impact of tariffs, Powell referenced analysis from 2018, mentioning that the central bank may take a hands-off approach to one-time price changes in certain circumstances. However, he also noted that the impact of tariffs on monetary policy may differ from that year due to the lack of specific details and changes in the current economic environment. Despite the uncertainty, Powell still believes that the easing trend in inflation remains unchanged, mainly due to cooling in the labor market, which will not create pressure to raise prices. Overall, DWS is more confident that the Federal Reserve will take a longer time to bring rates down to a neutral level. However, in the face of rising political uncertainty, caution must be maintained. Tariffs are generally one-time price changes that will naturally fade from inflation data after 12 months. But some economic forecast models suggest that tariffs may have negative effects on demand and the labor market. On the other hand, past experience shows that fiscal stimulus and a decrease in labor supply can indeed exacerbate price pressures. The evolution of these competing effects remains highly uncertain at present.
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