Economists see election slowing Fed rate cuts through 2025

Over eight in 10 of the economists surveyed by Wolters Kluwer in December think the new political environment created following the elections will slow the pace of Federal Open Market Committee reductions in short-term rates.

The group reduced its outlook for the full year 2025 cut to the Fed Funds Rate to 84 basis points on average, down from 108 basis points in November and 116 basis points in October.

While most of the economists on the panel still expect the FOMC to reduce rates at its upcoming meeting on Dec. 17 and 18, 10% said the next cut will be in January, while 2% don't think one will happen until March.

However, all of those surveyed expect the next reduction to be 25 basis points.

The 88% of the BCEI panel who think the FOMC will cut rates 25 basis points at the next meeting is similar with the 89% of the Fed Funds futures market that is making the same bet, the Wolters Kluwer report noted.

But the futures market is now more bearish on rate cuts than the BCEI. At the time of the report, the futures market was expecting an 80 basis point reduction during next year, versus 90 basis points at the end of October and 140 basis points at the start of the month.

When asked if the results of the presidential elections would slow the pace of Fed Funds Rate reductions going forward, 81% said yes, while 19% responded no.

The consensus probability of a U.S. recession in the next 12 months was 26%, with 45% saying inflation is likely to turn upward again in the next six months.

"Financial market expectations concerning the pace of future FFR reductions have changed meaningfully over the past few months for a variety of reasons in addition to the election results — the resilient U.S. economy, sticky inflation and indications of increased rate-cutting patience from Fed officials," Wolters Kluwer said. "Nevertheless, the Fed is still widely expected to reduce the FFR at its next FOMC meeting."

Unlike the Fed Funds Rate, pricing on the 10-year Treasury yield, one of the elements used to determine 30-year mortgage rates, is market-based.

On Sept. 18, the day the FOMC announced a 50 basis point reduction in short-term rates, the 10-year closed at 3.69%. The following day it rose to 3.74% and on Oct. 7, the close was at 4.03%.

Since then, the yield has been up and down but still well above 4%, peaking at 4.45% on Nov.13, before ending the month at 4.18. 

But what the panel thinks about the 10-year yield for next year is not good news for mortgage lenders.

"The BCEI consensus thinks that the November high was the peak for the 10-year yield," the report said. "However, it looks for this rate to decline only modestly during 2025 — by just 10 basis points."

The only saving grace is that spreads between the 10-year Treasury and 30-year mortgage are still an abnormally wide 236 basis points, according to Optimal Blue data from Dec. 9. That might give room for mortgage rates to fall further.