• Scotiabank economists forecast the U.S. Federal Reserve will begin lowering its policy rate in the coming months.
  • The call comes as the Fed holds its benchmark rate steady at 4.25%-4.50%, a level maintained for several consecutive meetings.
  • High inflation risks, particularly from recent protectionist trade policies, mean the bar for easing remains elevated.

Efforts to predict the Federal Reserve's next move have hit a new level of complexity, but analysts at Scotiabank are placing their bets on a dovish pivot. The bank assesses that the U.S. central bank is likely to begin the process of easing monetary policy within the coming months, a significant shift from its current hold stance.

The Fed has kept its benchmark federal funds rate in the 4.25%–4.50% range since its last cut in late 2024, a period characterized by persistent inflation and significant policy uncertainty. This prolonged pause has left markets parsing every data point and Fed official's comment for clues.

According to Scotiabank's analysis, the high bar for further easing is a direct result of ongoing inflation risks. A major factor complicating the picture is a recent, aggressive increase in U.S. import tariffs. These protectionist trade policies are expected to curb economic growth, potentially cost jobs, and, crucially, put sustained upward pressure on consumer prices. This creates a difficult environment for the Fed as it tries to balance its dual mandate of price stability and maximum employment.

Internally, Fed policymakers appear divided on the path forward. The latest Summary of Economic Projections suggests some officials believe two 25-basis-point cuts could be appropriate in 2025, while others have argued for holding rates unchanged for the entire year. This lack of consensus adds another layer of unpredictability for investors and economists alike.

Scotiabank's outlook suggests that as economic growth is forecast to slow—potentially to 1.5% in 2025 and 0.9% in 2026—increased spare capacity in the economy should eventually help subdue inflation, paving the way for lower rates. However, the timing remains highly contingent on incoming data. The Fed is widely expected to hold rates steady for its next several meetings, with a move more likely in the latter half of the year if inflation shows clear and sustainable signs of decline.

This cautious stance places the Fed as the last of the G10 central banks expected to cut rates in 2025, creating a divergent policy path with other major institutions like the European Central Bank and the Bank of Canada, which have already begun their easing cycles. The U.S. central bank continues to resist political and public pressures to ease policy prematurely, emphasizing its data-dependent and independent approach.

Scotiabank and other commentators see substantial risks on both sides of the debate: holding rates too high for too long could unnecessarily stifle economic growth, while cutting too soon could risk reigniting inflation. For now, the market's focus remains fixed on inflation prints and employment data, with the Fed's patience being the defining feature of the current cycle.