Since Trump was elected for a second term last month, policymakers at the Federal Reserve, including Chairman Powell, have stated that it is still too early to incorporate the yet unspecified policies of the incoming U.S. president into forecasts.

However, eight years ago, Powell joined the majority of his colleagues as a Federal Reserve governor, and the meeting minutes showed that they raised their expectations for economic momentum and interest rates to reflect the anticipated effects of Trump's tax cuts and other policies.

Therefore, when Fed policymakers gather this week, expected to implement the third rate cut this year and update their forecasts for growth, unemployment, and inflation, it may not be surprising if they again raise their expectations for U.S. economic growth.

In September, officials estimated next year's growth rate at 2%. However, the Philadelphia Fed's survey of professional forecasters has raised its estimate for 2025 from a previous 1.9% to 2.2%.

Fed officials may also lower their predictions for how much further they will cut rates next year. It is certain that they might not want to attribute this to Trump but instead point to recent data showing strong growth momentum, which could drive growth, suppress unemployment, and keep them vigilant on inflation.

But this may still be a preliminary determination of Trump's future actions as he has promised further tax cuts, deregulation, and tariff increases.

Economists at Morgan Stanley wrote, 'We believe Powell and the Fed will formulate monetary policy based on actual changes in fiscal, trade, and immigration policies rather than preemptively.' Even so, they noted that forecasts from Fed policymakers may indicate strong growth in 2024, with a slowdown in anti-inflation progress this year and next, 'as well as fewer rate cuts.'

Since their last meeting in November, several Federal Reserve officials have indicated that they prefer a more cautious pace of interest rate cuts, especially as the labor market appears less fragile than it did in September when they began cutting rates, and inflation is more persistent.

Their latest best guess regarding the economic and interest rate trajectory over the next three years will be published in the latest quarterly forecast released at the conclusion of the meeting on December 17-18.

Even setting aside the uncertain impacts of Trump's plans, there is ample reason to believe that policymakers will consider smaller interest rate cuts next year simply because they will be assessing overall stronger economic data since their last forecast.

According to the Federal Reserve's preferred inflation indicator—the PCE price index—October's inflation rate was 2.3%, which aligns with what policymakers had previously predicted for inflation in the last quarter of this year.

However, thus far, data released indicates that the core PCE price index is on track to reach approximately 2.8% by year-end, and several Wall Street Analysts believe this inflation pressure will extend into 2025. Federal Reserve policymakers forecasted in September a core PCE inflation rate of 2.6% for the fourth quarter of 2024 and 2.2% for the last quarter of 2025, which, given recent trends, seem overly optimistic.

In contrast, the unemployment rate has remained below the forecasts of Federal Reserve policymakers, with 4.1% in October and 4.2% in November. Only a significant deterioration this month would push the average for the fourth quarter up to the 4.4% forecasted by policymakers during the September meeting, and Analysts generally expect officials' new unemployment rate forecasts to be a few percentage points lower than this.

A stronger labor market and more persistent inflation may prompt some policymakers to lower their interest rate cut expectations. Most Analysts expect that the median forecast among officials will involve three rate cuts of 25 basis points each next year, which aligns with the current pricing in financial markets, although some believe that a more hawkish prediction of only two cuts is possible.

Analysts also expect policymakers to further lower the number of rate cuts projected for 2026, bringing the policy interest rate down to 3.4% or 3.1%, compared to the September forecast of 2.9%, the latter being equivalent to the 'stop point' for the federal funds rate that policymakers have consistently acknowledged.

Dallas Fed President Logan believes that as the Federal Reserve's policy rate approaches its final stopping point, the pace should slow down, just as a captain must do when entering port. Some Analysts expect this interest rate expectation to rise to 3% or even higher, which further strengthens the argument for the Federal Reserve to slow down.

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