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Investing.com-- Macquarie has thrown in the towel on its no-cut call for 2025, now expecting the Federal Reserve to deliver a rate cut in December after the Fed on Wednesday doubled down on its outlook for two rates cuts—even as it raised its inflation forecast. This shift, Macquarie says, signals a new era of tolerance for higher inflation at the Fed.
“The willingness of FOMC participants to continue to project 50 bps of cuts despite projecting more elevated core PCE inflation leads us to shift our baseline view for the timing of rate cuts ahead,” Macquarie economists said in a Wednesday note, marking a sharp U-turn from its previous forecast for no cuts in 2025.
While Macquarie continues to forecast 50 basis points of cuts ahead, it now expects one 25 basis point cut in December 2025 and another in 2026, bringing forward its timeline for easing, from a prior estimate for no cuts for 2025. The economists, however, also pointed to the distribution of FOMC participants’ rate forecasts -- which was a close call, with nearly half seeing just 25 bps or fewer cuts by the end of next year -- as a sign that the Fed is leaning more hawkish.
The Fed held rates steady at 4.25% to 4.5% and left its median dot plot for end-2025 unchanged, still pointing to 50 basis points of cuts by year-end. But the central bank also lifted its core PCE inflation forecast for 2025 to 3.1% from 2.8%, and for 2026 to 2.4% from 2.2%, a move that the economists believe underscores the Fed’s willingness to “wait and learn more” before making its next move.
In the press conference that followed the decision, Chairman Jerome Powell reiterated the message of patient, stressing that “uncertainty had diminished but remains elevated,” and that the committee is “well positioned to wait and learn more” as the economy remains solid. He flagged four big sources of uncertainty: trade, immigration, fiscal policy, and regulation.
Tariffs, which have been driving the bulk of the uncertainty and making the Fed’s job of forecasting complicated, are expected to deliver a transitory boost inflation, the fed chair suggested, though admitted it “takes some time” for tariffs to feed into consumer prices and that the process is tough to predict.
The Fed expects to learn much more about the impact of tariffs over the summer, with Powell noting that many companies plan to pass on added costs to consumers.
The labor market, meanwhile, remains “solid,” with Powell describing it as “overall in balance” and showing only gradual cooling. The Fed’s updated projections see unemployment ticking up to 4.5% by the end of 2025, with real GDP growth marked down to 1.4% for 2025 and 1.6% for 2026.