Macquarie Now Expects Fed Rate Cut in December Amid Shift Toward Inflation Tolerance

Macquarie has reversed its no-rate-cut stance for 2025, now predicting a 25-basis-point cut by December after the Federal Reserve maintained its projection for two rate cuts despite raising its inflation forecast. The investment bank said the Fed’s decision signals a shift toward greater tolerance for higher inflation.

In a recent note, Macquarie economists cited the Fed’s willingness to stick with 50 bps of rate cuts while projecting a higher 3.1% core PCE inflation in 2025—up from 2.8%—as a reason for pulling forward its rate-cut forecast. The bank now expects one cut in December 2025 and another in 2026, marking a sharp U-turn from its prior forecast of no cuts this year.

The Fed kept its benchmark rate unchanged at 5.25%-5.50%, with the “dot plot” showing a median outlook of 50 bps in cuts by year-end. However, nearly half of FOMC participants see only 25 bps or fewer, indicating lingering hawkish sentiment.

At the post-decision press conference, Fed Chair Jerome Powell emphasized a cautious approach, noting that uncertainty has eased but remains high. Powell identified four major areas of concern: trade, immigration, fiscal policy, and regulation. He highlighted that new tariffs could temporarily raise inflation, with their full impact expected to unfold over the summer as companies pass on higher costs to consumers.

Despite inflation risks, Powell said the labor market remains “solid,” with only gradual cooling. The Fed projects unemployment to rise to 4.5% by end-2025, alongside slower GDP growth of 1.4% in 2025 and 1.6% in 2026.

This cautious stance underscores the Fed’s “wait and see” strategy as it navigates persistent inflation and policy uncertainties.