By lowering its rates by 50 bps, the American Federal Reserve (Fed) decides to erase its last two increases of May and July 2023, but it implicitly recognizes, in our opinion, that it could perhaps have already acted in June by an initial drop of 25 bps. The monetary easing cycle is therefore now underway and the projection of median FOMC Dots for the end of 2025 is consequently lowered to 3.375.
This target suggests around six rate cuts over the next fifteen months. But on the Fed Funds side, the implicit rate for the end of December 2024 of 4.32% has already been lowered to 3.25% for the end of June 2025. Without major surprises and while maintaining a scenario of moderate slowdown in American growth still above 2% annualized over the next three quarters, we estimate that the market is already expecting six rate cuts before June 2025.
The Fed has therefore set a new course for rate cuts in 2025 towards a target estimated between 3.25% and 3.5%. President Jerome Powell had already stressed a few months ago that he was ready to relax the reins of his policy if the evolution of inflation parameters allowed it and if the job market showed signs of slowing down, c is now the case. He also mentioned that he would not wait to see inflation fall below its technical target of 2% and would in this case implement the expected easing. This is also the case since inflation is indeed sliding but has not yet reached the 2% threshold.
Today inflation has actually fallen to 2.5% and 3.2% for the index excluding food and energy, which remains far from its formal objective. We estimate that the Federal Reserve will once again lower its key rates on November 7 by a standard increment of 0.25% following the US elections. It is once again the time to extend the durations of dollar bond segments while ten-year Treasury yields are once again temporarily above 4%.
