Risks in focus for FOMC heading into 2025
Policy making will become more challenging in 2025, with a myriad of risks apparent.

At its December meeting, the FOMC delivered another 25bp cut as expected, bringing cumulative easing since September to 100bps. That said, the tone of the statement was non-committal on the outlook for policy, and the projections slowed the expected pace of easing. September’s 3.4% fed funds forecast for end-2025 is now not seen until end-2026. The longer run policy view from the FOMC was only edged up from 2.9% to 3.0% however, signalling confidence in the effectiveness of policy and disinflation more broadly as well as a gradual approach to revising the ‘longer run’ neutral rate. The FOMC’s median estimate is now up 0.5ppts over the past year, but still sits within a wide range of FOMC member estimates, from 2.4% to 4.1%.
The FOMC’s view on the economic outlook from 2025 is little changed despite a stronger expectation for 2024 (2.5% GDP growth now forecast, up from 2.0% in September). Growth is then expected to edge lower, from 2.1% in 2025 to 2.0% in 2026 and 1.9% in 2027, staying above the FOMC’s ‘longer run’ trend estimate of 1.8% throughout. No further deterioration is expected in the unemployment rate, with 4.3% expected in 2025-2027 versus 4.2% today. Note, 4.2% is also the FOMC’s median estimate of the full employment level. The implication here is that the FOMC believes productivity and/or population growth will hold above its long-run trend for the foreseeable future.
PCE inflation is noticeably higher in 2025 at 2.5% (previously 2.1% for headline and 2.2% for core), but settles quickly thereafter near the 2.0% target, where it remains into the ‘longer run’ despite the economy consistently operating at full capacity. While not specified, the 2025 view is arguably influenced by the potential impact of tariffs, in addition to inflation’s persistence through 2024, called out by Chair Powell in the press conference.
Given their sanguine view for growth and near-term upside risks for inflation, the FOMC have slowed the pace of easing expected over 2025–2027. The median expectation for 2025 is now two cuts to 3.875% instead of four. Another two cuts are still expected in 2026 to 3.375%; and one more is projected for 2027 to 3.125%. At 3.0%, the December ‘longer run’ forecast is marginally higher than in September (2.9%) but still a touch below the current end-2027 view (3.1%).
Risks to achieving the FOMC’s inflation and employment goals are believed to be “roughly in balance” but are significant and front of mind. Interestingly, this is more the case for the labour market and GDP than inflation, with a wide range of forecasts around the activity medians. For the unemployment rate, the Committee’s forecast range is 3.9% to 4.6% by end-2026 and 3.5% to 4.5% in the ‘longer run’. The possibilities for GDP growth are similarly broad, from 1.4% to 2.5% in 2026 and 1.7% to 2.5% in the ‘longer run’.
As discussed with respect to both the US economy and US dollar in our latest Market Outlook, we also believe it is important to keep risks front of mind. However, we anticipate downside activity risks are more probable in 2025 and upside risks for inflation from 2026. This is witnessed to by our own fed funds profile for four cuts through 2025, as was the case in 2024, followed by two hikes in the second half of 2026. As such, our end point at December 2026 for the fed funds rate is 40bps higher than the FOMC’s, while our US 10-year yield forecast of 4.80% at that time points to persistence in inflation and interest rate risks in the years hence.
Justifying our 2025 view is the stalling out of household employment and sequential deceleration in nonfarm payrolls gains to a pace below the month-average rate consistent with the labour market balance the FOMC is seeking to achieve. This loss of income for households is expected to continue to slow consumption and limit momentum in housing while business investment growth remains modest.
Behind our medium-term concern over inflation are supply constraints, not an uptick in cyclical demand. Put simply, tariffs will take time to come through to consumer prices, while the inflation consequences of the narrow base of business and housing investment in recent years is expected to slowly build from late-2025. The more uncertainty that fiscal policy creates, the greater the threat to inflation come 2026, both in terms of its persistence and scale. Note, deregulation may provide an offset to these supply constraints; yet, the lags that come with deregulation and productivity are long at the best of times, so meaningful benefit is unlikely before 2027.
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