With Republicans winning the US trifecta of president and both houses, how can monetary policy accommodate incoming president Donald Trump’s seemingly frictionless economic ambition?   

The most immediate question is whether financial and economic conditions will require the Fed to keep cutting, or allow it to take stock and pause.

We expect 50 basis points (bp) of easing in 2025, and most of this to be done in Q1. In the wake of the presidential election, we no longer expect cuts in April and June, owing to the inflationary pressures of increased tariffs, among several factors. We also expect the Fed’s terminal rate to exceed the neutral, or ideal, rate.

Inflation cooled in 2024, with core Personal Consumption Expenditures (PCE) falling from 3.0% at the end of 2023 to 2.7% currently. Heading into 2025, we are less optimistic this trend will continue. However, with a Trump victory we reasonably expect upside risks to core goods prices (tariffs), and our forecast for PCE inflation for the end of 2025 (year on year) has grown from 2.4% to 3.2%.

With fiscal stimulus on the cards, the key question is what happens if the change in strategy under a new president alters underlying inflation and economic growth. While any initial fiscal impulse from the newly elected President may not be high in 2025, beyond then the policy will require relatively higher degrees of restrictive monetary policy.

Inflation, of course, is only one part of the Fed’s mandate and it is now focussing back on labour. We project the jobless rate will move back up to 4.25% at the end of 2024 and peak at 4.75% in the Spring of 2025. Fed officials expect a peak of 4.4% at the end of both 2024 and 2025.

Like the Fed, the Bank of England (BoE), AKA the Old Lady of Threadneedle Street, enters 2025 with the challenge of fitting monetary policy to a new government’s fiscal commitments.

In 2024, the BoE delivered two 25bp cuts and the 2024 Autumn Budget brought a fiscal stimulus of 1% to GDP. But as of November 2024, the Bank’s policy guidance was essentially unaltered, signalling an ongoing ‘gradual’ pace of easing (implicitly 25bp cuts per calendar quarter). However, market pricing for Bank Rate in 2025 flipped from being materially more dovish than our forecasts pre-Budget to marginally more hawkish afterwards.  

The fiscal stimulus in the Budget is judged by the BoE to be inflationary, adding ‘just under 0.5 a percentage point at the peak’ to Consumer Price inflation (CPI). Consequently, our forecast is for terminal rates to fall to 4.0% in May 2025, albeit subject to slippage. 

Despite falling from the 11%+ highs in 2022, the battle against inflation is not over. The BoE’s own Decision Maker Panel (DMP) survey readings on wage and price expectations have not conclusively returned to target, with one-year and three-year CPI expectations at 2.5%.  

To underline how delicate an economy the BoE faces, labour supply remains impaired, and the UK’s capital stock appears depleted by years of anaemic investment.  

While the BoE’s remit is focused on hitting 2% inflation, a fix for the country’s deeper economic woes complicates the BoE’s mission.

The European Central Bank (ECB) was the first major central bank to cut rates in the current cycle. Inflation may have been tamed, but prospects for growth look anaemic.  

As of mid-November, the ECB made three 25bp rate cuts and we expect a fourth in December. In 2025, we predict four more cuts in the first half, bringing the policy rate down to what we think is a terminal 2.0%.  

Inflation expectations also point to around 2%, with the ECB’s expectations now just above 2%. Growth dynamics haven’t suggested excess demand, while fiscal policy is no longer expansionary and is expected to stay that way for the foreseeable future. Labour supply looks unlikely to spur inflation and looks able to sustain trend output growth of what we see as approximately 1.25%.

While there are good reasons to expect a re-acceleration in output growth in the coming quarters, recent surveys have surprised with less impressive data, dampening our view of a rebound in 2025.  

It’s a question of wait and see.

Visit natwest.com/yearahead for more expert insight to help you navigate the year ahead and speak with your NatWest contact about how you can prepare today.