By Ann Saphir

Economic Outlook Post-Trump Election

WASHINGTON (Reuters) – Following Donald Trump's election to a second term last month, Federal Reserve policymakers, including Chair Jerome Powell, assert that it's premature to incorporate the president-elect's forthcoming policies into economic forecasts.

Historical Context

Eight years ago, Powell, as a Fed governor, aligned with colleagues to adjust estimates for economic growth and interest rates based on the anticipated impacts of Trump's tax cuts and policies.

Growth Projections

This week, as Fed policymakers convene, a growth upgrade for next year seems possible alongside expectations for a third interest rate cut. In September, officials projected a 2% growth rate for the upcoming year, but the Philadelphia Fed has since raised its 2025 estimate to 2.2%.

Interest Rates and Inflation

Fed officials may adjust their projections for interest rate cuts next year, attributing potential growth improvements to recent solid economic data rather than directly to Trump. Economists at Morgan Stanley noted that Fed projections will likely show stronger growth in 2024 and slower disinflation in the coming years.

Cautious Rate Cuts

Since their last meeting in November, U.S. central bankers expressed openness to a cautious rate-cutting pace due to a firmer labor market and persistent inflation. New projections for the economy and interest rates will be presented after their December 17-18 meeting.

Current Economic Indicators

In October, the inflation rate was 2.3%, aligning with Fed forecasts. However, core PCE inflation is expected to be around 2.8% by year-end, higher than prior predictions. Meanwhile, the unemployment rate has been lower than expected, suggesting potential downward revisions in Fed projections.

Summary of Projections

Regarding the rate outlook, analysts forecast three quarter-point cuts next year, aligning with current market expectations, while some speculate on a more hawkish two-cut projection. Projections for rate cuts in 2026 may also see adjustments, moving closer to a 3.4% or 3.1% policy rate based on more cautious approaches suggested by Dallas Fed President Lorie Logan. Many analysts anticipate the 'longer-run' estimate for the federal funds rate may rise above 2.9%, supporting a slower adjustment strategy.