This Thursday, the Fed complicated the scenario that everyone took for granted: it reduced its rates by 25 basis points. The Fed Chairman faced a completely hectic appointment due to Trump’s arrival at the White House the day before. All markets were waiting for the big question: now what will happen to rates? Although Powell offered no clues about the direction monetary policy will take in the coming months, a sentiment is emerging among leading Wall Street experts. A curtain of fog is spreading and the route of the cuts which seemed practically a fact is now compromised or, at least, called into question. In this sense, everyone highlights the succession of data in the weeks to come and opens the door, even to a “truce” without reductions in December. What everyone agrees on is that the central bank is now entering a new phase in which it will have to be more cautious when it comes 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 pace of rate cuts in the United States slowed, but it has also included some changes in the official speech, which confirm a moderation in the outlook for rate cuts by the agency for the coming quarters.
First, the Fed removed from its September speech a reference to its confidence that inflation would fall to the 2% target. “The Fed is increasingly convinced that inflation is moving sustainably towards the 2% objective,” they explained in September. This sentence has disappeared. At the same time, the Fed removes 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 points out.
This speech is part of a scenario in which the resilience of the economy surprises on the upside, and which seems to lead the Fed to slow down the pace of rate cuts that the markets have anticipated in recent weeks.
The direction of the Fed now
For now, swap market expectations remain unchanged. The probability of a drop in December remains in the majority (68%). However, the option of a reduction in January has been completely diluted, now being 26% whereas a week ago it was 45% and a month ago it was 65%. Regardless, in the medium term, a more relaxed Fed appears to have emerged as the strongest thesis for the market. For June, only a cut of between 50 and 75 basis points is expected, two practically linked options. The option of reducing rates only twice over this entire period was a fantasy not so long ago, with only 9%, today they exceed 30%.
In any case, some of the most prestigious analysis firms on Wall Street believe that the current assessment 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 “even if the cuts in December remain the ‘natural slope’, it would not take much in the upcoming inflation and employment data to give pause to the FOMC.” Even if a truce does not materialize in December, “we expect a pause in January and believe the Fed will stop at 4.25% in March.”“something that will “generate a major gap for the new incoming Republican administration.”
That data that could change everything is next Wednesday’s CPI data, which shows a monthly increase of 0.3% and the first jobless claims for Thursday. Concerning the first, markets expect prices to continue to accelerate after the 0.2% increase recorded last month. However, any upside surprises could prove crucial. For its part, the job market is arriving at a slightly healthier time than it seemed not so long ago, when there were fears of a sharp slowdown. The unemployment rate is at 4.1%, the same as in September and two-tenths below its July high.
Tiffany Wilding and Allison Boxer, economists at Pimco, agreed that given the signals from the November meeting, “we think the odds of another rate cut in December have diminished” and, regardless of what happens, will pass during this specific meeting, “with the reductions as it has already done (75 basis points), the Fed now has the flexibility to now act slowly and methodically.” Especially because “the US economy continues to resist “. All these factors have led the world’s largest bond company to defend that from now on “the institution will distance itself and wait for the data”.. Starting in January, Congress and the White House will clarify the Fed’s path forward. »
An opinion very close to that of the DWS experts who explain that even if they take the December reduction for granted, “we think that in the medium term there could be fewer reductions than we expected ago a few weeks. The Fed no longer seems to agree. in a hurry to lower rates towards neutrality, as Powell says. From BCA they are betting on the last month of 2024 as the big surprise and affirm that “Powell’s comments indicate that a possible pause if the data continues to surprise positively” given that “the Fed sees less risk for the economy, which remains important to stay in restrictive territory a little longer.
There are some like Salman Ahmed, global macro manager at Fidelity International, who goes further and even mentions the possibility of rate hikes in the medium term in the face of a return of inflation thanks to Trump’s policies. The Fed “changed the language to add some degree of caution about the future direction of monetary policy” but, although Powell said this would not affect policy for now, “2025 could be a very different story.” In this sense, Ahmed defends that “even for December, the conditionality of the data has been raised a notch” and that “it is likely that the final rates will reach a lower level than expected, given the margin for a policy reflationary budget. year.” In fact, “if the dynamics of reflation and inflation driven by tariff policy return, it is possible that increases will have to be considered.”
Not everyone agrees. A clear example is what Eric Winograd, economist at AllianceBernstein, comments, saying that “the basic assumption continues to be reductions of 25 basis points per meeting.” The expert goes on to say that “my view is similar enough to that of the Federal Reserve to anticipate 25 basis point cuts at the December and January meetings, with a March cut being more likely.” If I’m correct in “If the Economy Slows”, down significantly in the first quarter, then they will continue their sequential easing from there. ” SO, This analyst believes that the key meeting will be that of March, which will truly mark the path of the Fed.
From Danske Bank, they explain that the Fed “has no reason to delay the reductions” at first. However, they believe that the coming days, with Trump’s statements and inflation data, could have serious consequences. “If Trump’s policy plans cause a more persistent rebound in inflation expectations, a pause in December may be warranted.” Furthermore, “if more expansionary fiscal policies suggest that the neutral rate will increase, then “We think the Fed could end the easing cycle sooner.”
Steven Blitz of TS Lombard also believes that there will be no change of course for now or, at least, that should be the base case. The reason is the labor market since “the FOMC estimates that it has cooled enough for inflation to return to 2%.” In this sense, he recognizes that a certain uncertainty is now created. “As the neutrality zone (of monetary conditions) is still far away, they will remember it in December, but then no one knows what will happen.” In this sense, the development of the last month of the year “is insurance against a further cooling of employment, but we will then have to wait to see how events develop in 2025”. A start to the year with one of the greatest uncertainties in memory.
