A quick rate cut after a rate hike? Pantheon expects the Federal Reserve interest rate to fall to 3.125% by the end of 2027

The Zhitong Finance App learned that Pantheon Macroeconomics predicts that the Federal Open Market Committee (FOMC) will shift to large-scale policy easing next year, lowering the federal funds rate from the current target range of 3.75%-4.00% to 3.125% at the end of the year. Even raising interest rates by another 25 basis points within this year is a near-term risk, as soaring energy costs are driving up core commodity prices.

The key to this shift in expectations is consumer exhaustion. Pantheon wrote in a report that the strong performance of household spending this year was due to large tax rebates in spring and rising stock prices, but most of that cash now appears to have been spent or used to pay debts.

According to the report, spending growth should slow significantly in the fourth quarter of 2026 and the first quarter of 2027 as tax refund support fades and pressure on the balance sheets of low-income households increases. Low-income families will also feel the impact of tighter eligibility requirements for Medicaid (Medicaid) and SNAP (Supplemental Nutrition Assistance Program) in 2027.

Meanwhile, core PCE inflation is expected to remain largely unchanged until late 2026, followed by significant progress towards the 2% target in the first half of 2027 — at which time tariffs and energy-related price increases will break out of the year-on-year comparison base.

Labor market dynamics have further strengthened the rationale for relaxation. According to Pantheon, employment growth has slowed to a monthly trend level of around 7.5 million in preliminary estimates — possibly closer to 2.5 million after correction — while the negative impact of AI on labor demand is accumulating, particularly in high-usage industries such as information, finance, and professional services.

Pantheon also pointed out that historically, the Federal Reserve is moving fast: in the past 40 years, the average interval between the last rate hike in the austerity cycle and the first rate cut was only six months. Federal Reserve Chairman Walsh was appointed by a president who is constantly pressuring lower interest rates, and fiscal policy is no longer boosting GDP growth. As 2027 begins, it should become easier to forge consensus around interest rate cuts.