This Thursday the Fed has complicated the script that everyone took for granted, it has cut rates by 25 basis points. The president of the Fed faced a totally turbulent appointment due to Trump’s rise to the White House a day earlier. All markets were waiting for the big question: and now what will happen to the rates? While Powell did not provide any clues about the direction monetary policy will take in the coming months, a feeling is emerging among leading Wall Street experts. A curtain of fog spreads and the path of cuts that seemed practically a fact is now compromised or, at least, in question. In that sense, everyone points to the succession of data in the coming weeks and opens the door, even to a ‘truce’ without cuts this December. What everyone agrees on is that the central bank is now entering a new phase, in which it will have to tread more carefully with regard to rate cuts.
This Thursday’s Fed meeting confirms that Jerome Powell, president of the organization, has qualified the institution’s message. Not only has the rate at which rates are being lowered in the United States been reduced: it has also has included some changes in the official discourse, which confirm a moderation in the prospects for rate cuts by the agency for the coming quarters.
First, the Fed has deleted from its September speech a reference to its confidence that inflation will fall to the 2% target. “The Fed is increasingly confident that inflation is moving sustainably toward the 2% target,” they explained in September. That phrase has disappeared. At the same time, the Fed eliminates the reference to a “slowdown in employment growth” in the country, in exchange for a less aggressive message: “Labor market conditions have softened, in general,” Powell now highlights. .
The speech fits with a scenario in which the resilience of the economy is surprising on the upside, and which seems to lead the Fed to slow the pace of rate cuts that the markets have discounted in recent weeks.
The Fed’s direction from now on
For now, expectations on the part of the swaps market remain unchanged. The probability of a cut in December remains majority (68%). However, the option of a cut in January has been completely diluted, now being 26% when a week ago it was 45% and a month ago it was 65%. In any case, in the medium term a more relaxed Fed seems to have established itself as the market’s strongest thesis. For June, only a cut of between 50 and 75 basis points is expected, two practically tied options. The option of only cutting rates twice in this entire period of time was a fantasy not so long ago, with only 9% and now it is more than 30%.
In any case, some of the most prestigious analysis firms on Wall Street believe that the current balance is taken with a grain of salt and that we are very close to a possible turn of events. Gilles Moëc, chief economist at AXA IM comments that “although cutting in December remains the ‘natural slope’ it would not take much in the next inflation and employment data to give the FOMC pause.” Even if a truce does not end up happening in December, “we expect a pause in January and believe that the Fed will stop at 4.25% in March” something that “will generate a major discrepancy for the new incoming Republican administration.”
These data that could change everything are the CPI data for next Wednesday, which points to a month-on-month increase of 0.3% and initial unemployment claims for Thursday. Regarding the first, the markets expect prices to continue accelerating after the 0.2% advance that we saw last month. However, any upside surprise could be key. For its part, the labor market arrives at a moment that is somewhat healthier than it seemed not so long ago, when a clear slowdown was feared. The unemployment rate is at 4.1%, the same as September and two tenths below its July highs.
Tiffany Wilding and Allison Boxer, economists at Pimco, agreed that given the signals sent by the November meeting “we believe that the probabilities of another rate cut in December have decreased” and, regardless of what happens at that specific meeting, “With the cuts it has already made (75 basis points), the Fed now has the flexibility to move slowly and methodically from now on.” Mainly given that “the US economy continues to resist.” All these factors have led the world’s largest fixed income firm to defend that now “the institution will distance itself and wait for data. Starting in January, Congress and the White House will clarify the Fed’s path.”
An opinion very similar to that of the DWS experts who explain that although they take the cut in December for granted “we believe that in the medium term there may be fewer cuts than we expected a few weeks ago. The Fed no longer seems to be in a hurry to lower rates towards neutrality, as Powell says. From BCA they do bet on the last month of 2024 as the big surprise and say that “Powell’s comments indicate that a possible pause if the data continue to surprise positively” given that “the Fed sees fewer risks for the economy, which remains importance to staying in restrictive territory for a little longer.
There are some like Salman Ahmed, global head of macro at Fidelity International, who goes one step further and even talks about the possibility of rate increases in the medium term in the face of a return to inflation thanks to Trump’s policies. The Fed “modified the language to add a degree of caution about the future path of monetary policy” but, although Powell said it would not affect policy for now, “2025 could be a very different story.” In that sense, Ahmed defends that “Even for December, the conditionality of the data was raised one notch” and that “it is likely that final rates will bottom out at a higher level than expected, given the margin for a reflationary fiscal policy next year.” In fact, “if the momentum of reflation and inflation driven by tariff policy returns, it is possible that increases will have to be considered.”
Not everyone agrees. A clear example is what Eric Winograd, an economist at AllianceBernstein, comments, arguing that “the base hypothesis continues to be cuts of 25 basis points per meeting.” The expert goes on to argue that “my view is similar enough to that of the Federal Reserve to forecast 25 basis point cuts at the December and January meetings, with a March cut as more likely. If I am correct in “If the economy slows down significantly in the first quarter, then they will continue sequential easing from there.” Therefore, This analyst believes that the key meeting will be the one in March, which will really mark the Fed’s path.
From Danske Bank they explain that the Fed “has no reason to delay the cuts” at first. However, they believe that the coming days, with Trump’s statements and inflation data, could have great consequences. “If Trump’s policy plans cause a more persistent rebound in inflation expectations, a pause in December could be warranted.” Furthermore, “if more expansionary fiscal policies suggest that the neutral rate will shift upward, then “We believe the Fed could end the easing cycle early.”
Steven Blitz of TS Lombard also believes that there will be no change of course for now or, at least, that this should be the base case. The reason is the labor market since “the FOMC believes that it has cooled down enough for inflation to return to 2%.” In that sense, he does recognize that some uncertainty has been created now. “Since the zone of neutrality (of monetary conditions) is still far away, they will remember in December, but then no one knows what will happen.” In that sense, the movement in the last month of the year “is insurance against the further cooling of employment, but then we will have to wait and see how events will develop in 2025.” A start to the year with one of the greatest uncertainties in memory.
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