Bank of Korea New York Office Releases Second Half US Economic Outlook
Five IBs Forecast One Rate Cut, Two See No Change
Inflation Expected at 3% This Year... Tariffs to Add 0.8 Percentage Points
As expectations grow that President Donald Trump's tariff policies will increase inflationary pressures, seven out of ten major investment banks (IBs) on Wall Street predict that the US Federal Reserve (Fed) will lower its benchmark interest rate no more than once this year. This outlook is more conservative than the Fed's recent dot plot, which projected 'two rate cuts within the year.'
According to the "2025 US Economic Trends and Second Half Outlook" report released by the Bank of Korea's New York office on June 30 (local time), five of the ten Wall Street IBs?Barclays, Goldman Sachs, JP Morgan, Nomura Securities, and Deutsche Bank?expect the Fed to cut the current benchmark rate of 4.25-4.5% by 0.25 percentage points once this year. Bank of America (BoA) and Morgan Stanley forecast that the Fed will keep rates at their current level throughout the year.
TD Securities expects the Fed to cut rates twice within the year, in line with the recent dot plot. In the dot plot released immediately after the June Federal Open Market Committee (FOMC) meeting, the Fed indicated a year-end median benchmark rate of 3.9%, maintaining its projection of two cuts.
Citi and Wells Fargo expect the Fed to lower rates three times this year.
As a result, the average forecast for the total rate cut by the ten IBs by the end of this year has dropped significantly, from 0.63 percentage points at the end of 2024 to 0.33 percentage points as of June this year.
Regarding the timing of rate cuts resuming, eight out of ten IBs expect this to occur in the fourth quarter of this year. Only Citi and Wells Fargo, both projecting three cuts within the year, expect a rate cut in September.
The Bank of Korea's New York office explained, "The reduced rate cut outlook among major IBs is based on expectations that inflation will improve more slowly due to factors such as the Trump administration's tariff policies." The office added, "As the US has decided on a 90-day mutual tariff suspension and concerns about trade conflict reaching an extreme have eased, IBs are focusing more on inflation risks than on short-term economic slowdown."
IBs believe that the impact of tariff hikes by the Trump administration will be reflected in the prices of goods and intermediate goods, acting as upward pressure on inflation. Fifty-six IBs forecast this year's annual inflation rate, based on core personal consumption expenditures (PCE), to be around 3%. As of June 4, Goldman Sachs analyzed that the average effective tariff rate from already implemented measures stands at 13%, estimating that this could raise the inflation rate by about 0.8 percentage points.
However, IBs expect that while inflation may temporarily rise in the second half of the year as companies deplete inventories, it will slow to around 2.7% next year.
In the labor market, while employment may weaken somewhat due to a slowdown in the real economy, the risk of a significant increase in unemployment is seen as limited. Sixty-two IBs forecast the unemployment rate to be 4.5% this year and 4.4% next year.
In the second half of the year, the US economy is expected to experience slower growth due to policy uncertainty and the impact of tariff increases. Seventy-seven IBs forecast US economic growth at 1.4% for this year, a significant downward revision from the 2.1% projected at the end of last year.
Meanwhile, the number of rate cuts next year is projected to be between two and three.
The Bank of Korea's New York office stated, "IBs believe that the dampening of household consumption and corporate investment will be limited due to asset effects and fiscal policy, and that the US economy will experience a gradual slowdown rather than a recession." The office added, "The Fed's total rate cuts are expected to be limited to three to four by 2026, with the final rate remaining in the mid-3% range."
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