Pantheon Macroeconomics predicts Fed pivot to rate cuts next year, but warns of one more hike this year

By Caixin Global | Editor: Huang Junzhi

According to Pantheon Macroeconomics, the Federal Open Market Committee (FOMC) is expected to shift toward substantial easing next year, lowering the federal funds rate from its current target range of 3.75%–4.00% to 3.125% by the end of 2027.

However, the firm also cautioned that there remains a risk of one additional 25-basis-point rate hike this year, driven by surging energy costs pushing up core goods prices.

Consumer Fatigue Driving the "Dovish Pivot"

Pantheon Macroeconomics attributed the anticipated dovish shift to consumer fatigue. In a recent report, the firm noted that strong household spending this year was supported by large tax refunds in the spring and rising stock prices. However, much of that liquidity appears to have already been spent or used to pay down debt.

As the boost from tax refunds fades, financial pressures on low-income households are intensifying. The report projects a significant slowdown in spending growth during the fourth quarter of 2026 and the first quarter of 2027. Low-income households are also expected to feel the impact of stricter eligibility requirements for Medicaid and the Supplemental Nutrition Assistance Program (SNAP) in 2027.

Inflation and Labor Market Outlook

Pantheon Macroeconomics expects core Personal Consumption Expenditures (PCE) inflation to remain largely unchanged through the end of 2026, before making substantial progress toward the 2% target in the first half of 2027, as tariff and energy-related price increases subside.

The firm also pointed to labor market dynamics as further justification for monetary easing. Preliminary estimates show new job creation has slowed to approximately 75,000 per month, and after revisions, that figure may be closer to 25,000. Meanwhile, the negative impact of artificial intelligence on labor demand is intensifying, particularly in high-usage sectors such as information, finance, and professional services.

Historical Precedent for Rapid Policy Shifts

Pantheon noted that, historically, the Fed has moved quickly when pivoting policy. Over the past 40 years, the average interval between the last rate hike in a tightening cycle and the first rate cut has been just six months.

"Given that Fed Chair [Warsh] was appointed by a president who strongly advocates for rate cuts, and fiscal policy is no longer boosting GDP growth, reaching a consensus on rate cuts should become easier as 2027 approaches," the report added.

Other Wall Street Forecasts

Goldman Sachs also projected in its latest report that the Fed will deliver its final rate hike of the year at the October 27 FOMC meeting, potentially marking the end of the current tightening cycle. However, the bank cautioned that sustained declines in oil prices to curb inflation are a key condition for the "two hikes and done" scenario.

Morningstar expects the Fed to begin cutting rates in the second half of 2027, with two rate cuts that year and further reductions in 2028, bringing the federal funds rate to a range of 2.50%–2.75% by the end of 2028.

Citi forecasts that the Fed will hold rates steady in October to assess the impact of the latest 25-basis-point hike, and then pause again in December. By then, a series of milder inflation readings should provide sufficient evidence that inflation is slowing, supporting another hold. Citi expects the Fed to resume rate cuts in June 2027 as inflation continues to cool.