The Federal Open Market Committee will in all likelihood keep the federal funds rate unchanged in a range between 4.25% and 4.5% when it meets this week.
Our forecast of the optimal federal funds rate implies a range between 3.75% and 4%, or a need for two 25 basis-point reductions this year—one in June and one in December—unless the economy slows back toward 2% growth or there is a shock to asset markets.
Federal Reserve officials won’t say it, but it’s clear that the central bank’s decisions this year will be shaped by the Trump administration’s policies on trade and immigration.
These policies could lead to higher inflation, or, just as important, raise inflation expectations, which would put the Fed’s long-held 2% inflation target at risk.
We now think that any change in the Fed’s quantitative tightening policy will be pushed back until the second half of the year until the Fed gets an accurate read on the direction of fiscal policy
Welcome to the era of fiscal dominance.
Read RSM’s global economic outlook for 2025 in the latest issue of The Real Economy.
