Economic forecasting can sometimes feel like solving a massive, constantly shifting puzzle. Right now, economists are adjusting their models and the predictions of those models as they relate to the likelihood of Federal Reserve rate cuts, and it’s all tied to concerns about potential inflation. A recent survey from the Financial Times and the University of Chicago shows a shift in thinking: many economists now expect rates to stay higher for longer, all because of possible policies from Trump that could stir up price pressures.
What’s driving this change? Let’s break it down. The fear is that things like tax cuts, deregulation, and tariffs could all push inflation higher. For instance, tax cuts and deregulation tend to stimulate the economy by giving businesses and consumers more room to spend. On the surface, that sounds great, but when demand for goods and services rises faster than supply, prices start climbing. Tariffs, on the other hand, are like a direct shot to higher prices—if imports get more expensive, those costs ripple through the economy.
These scenarios have economists rethinking how the Fed will respond. Not too long ago, the consensus was that the federal funds rate would dip below 3.5% by the end of 2025. Now, most experts think it will stay at or above that level. The shift reflects a growing belief that inflation might be stickier than hoped, which means the Fed could opt to keep interest rates higher for longer to avoid letting the economy overheat.
The Federal Reserve’s role in all this is kind of like adjusting a faucet. Too much flow (easy money) could flood the system with inflation, while tightening too much could slow everything down. Right now, the Fed seems to be erring on the side of caution. After an expected December rate cut, they might hold steady for a while, watching how the inflation story unfolds.
But what really throws a wrench in all this is the uncertainty around Trump’s potential return to the White House. Big tax cuts? Universal tariffs? More aggressive levies on China? All of these would complicate the Fed’s job. Over 60% of economists in the survey think these policies would hurt U.S. growth, and most believe they’d push inflation higher, too.
At the same time, there’s a lot of optimism about the U.S. economy. Growth forecasts for GDP have been nudged up, and most economists think a recession is still years away—possibly not until 2026 or beyond. This is a good reminder that forecasting isn’t about being static; it’s about staying flexible. As new information rolls in—whether it’s from the economy, policymakers, or global events—forecasts evolve.
For anyone studying finance, watching how professionals like these economists make their calls is a real-life example of connecting the dots. You take the data, think through the scenarios, and try to anticipate how all the moving parts might come together. It’s not about having a crystal ball—it’s about having a framework that helps you navigate uncertainty. And right now, this debate about inflation and rates is a masterclass in just that.
