Amid the uncertainty of fiscal policy and the persistence of inflation, respondents to the CNBC Fed Survey dialed back their expectations for interest rate cuts but still believe the central bank will ease this year.
Among the 25 respondents, 65% see two rate cuts in 2025, equal to the number penciled in by Federal Reserve officials in their recent forecasts and roughly equal to futures markets expectations. But that’s down from 78% in the prior survey, while 61% forecast at least one cut in 2026, down from 70% in December.
“I just don’t see (the Fed) having any confidence right now on how to proceed with rate cuts from here, especially as we await Trump’s tariff and tax policy,” said Peter Boockvar, chief investment officer at Bleakley Financial Group.
The fed funds rate is seen ending the year at 3.96%, 12 basis points higher than in the December survey, and 3.6% in 2026, up 16 basis points. A basis point equals 0.01%. The terminal rate, or the long-run nominal rate, edged up again, now standing at 3.4%, one-tenth of a percentage point higher than December, and three-tenths higher than March 2024.
The reduced outlook for rate cuts comes amid a decline in the probability of recession, an increase in inflation forecasts, and a mix of views on the inflationary and growth effects of the new administration’s anticipated policies.
Views on inflation
Highlighting the promise and uncertainty in the months to come, survey respondents gave sharply mixed reviews to President Donald Trump’s signature economic policies. Two of his campaign promises — tariffs and immigration — are seen boosting inflation and reducing growth. Two other policies — deregulation and tax cuts — are viewed as positive for growth and either neutral or positive for reducing inflation.
For example, 77% see tariffs as negative for inflation and 73% believe they are negative for growth. But 55% believe deregulation will reduce inflation and 68% believe it will boost growth.
“Reasonable economists can disagree just how inflationary tariffs or reductions in immigration might be, but they are inflationary,” said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott.
Mark Zandi, chief economist for Moody’s Analytics, added, “While the U.S. economy is on strong fundamental ground, much higher tariffs and significant immigrant deportations will diminish it, and taken too far, could undermine it.”
But Drew T. Matus, chief market strategist at MetLife Investment Management, countered, “Regulatory relief is a core feature of the incoming administration’s plans and will be a key driver of increasing economic activity.”
Richard I. Sichel, senior investment strategist at The Philadelphia Trust Co., sees broadly positive effects. “The new administration has energized everything, including the stock market,” he said. “Optimism and risk taking have increased. Lower taxes and less redundant regulations along with the ongoing success of technology innovation promote more efficiency and profits.”
Asked to assess the total effects of Trump policies expected to be enacted, 64% say they will be somewhat or very inflationary, 23% believe they will have no effect on inflation either way and 14% say they will be somewhat deflationary.
Yet 60% believe they will be somewhat or very positive for growth, 9% see them as neutral and 32% believe they will be somewhat negative.
That outlook is reflected in actual forecasts where the 12-month outlook for the consumer price index nudged up to 2.7% for this year, from 2.6% in December, and to 2.6% for next year from 2.5%. Forecasts for GDP edged higher to 2.4% for 2025, up 3 basis points, but remained unchanged at 2.1% for 2026.
The probability of a recession in the next 12 months dropped to 23%, from 29%, equal to the level in February 2022.
When it comes to tariffs on Mexico and Canada, majorities believe their enactment will depend on negotiations but that additional tariffs will be placed on China irrespective of negotiations.
Will Trump and the Fed clash?
Trump’s recent comments where he demanded that the Fed lower rates has respondents once again doubting he will respect the Fed’s independence. Just 36% believe he will do so, down from 56% in December.
“We could see a real test of Fed independence during 2025 as nominal growth might surprise on the upside, potentially putting the Fed officially on hold or even forcing them to raise rates,” said Richard Bernstein, CEO of Richard Bernstein Advisors. “The president won’t like stable to higher fed funds. A fight could ensue.”
But Kathy Bostjancic, chief U.S. economist at Nationwide, said, “We look for the Fed to stand steadfast to political influence and pause its easing cycle, at least through the first half of this year.”
Meanwhile, 64% say they don’t believe Trump will be successful in his plan to drive down inflation by increasing energy production and reducing energy prices.
“You can lead an oil company to leases, but you can’t make it drill,” said Robert Fry, chief economist at Robert Fry Economics. “Capital discipline means that instead of, ‘Drill, baby, drill,’ we’ll get, ‘Drill? Maybe not.'”
