Fed to continue with gradual policy normalisation

We expect the Fed to cut its policy rate by an additional 25bp at next week’s FOMC meeting, to between 4.25% and 4.50%, and to continue projecting that the fed funds rate will eventually end up close to neutral at slightly below 3%. In contrast, we suspect that incoming president Donald Trump’s planned tariffs and immigration curbs will trigger a minor resurgence in inflation from mid-2025 onwards, which will prompt the Fed to end its loosening cycle early, with the fed funds rate still at between 3.50% and 3.75%.