Jerome Powell, Chairman of the Fed (Credits: Federal Reserve)
By Christophe Boucher, Investment Director of ABN AMRO Investment Solutions.
Since its last meeting, there have been no unpleasant surprises regarding inflation, which should encourage the Fed to ease its monetary policy.
However, the tone of the Fed governors should be rather hawkish given that inflation is not yet at its target level and given the strength of economic activity.
The Fed has not committed to cutting rates in the future as uncertainty remains about what policies Trump will implement.
The dot plots should, however, provide an indication of the trajectory of monetary policy for the year 2025.
After the previous median of 4 declines forecast for 2025, governors may revise those expectations lower as they can afford to be more cautious thanks to so far strong economic data.
The drivers of inflation currently are house prices, which are lagging, and service prices, which are less sensitive to monetary policy.
We therefore believe that the Fed should cut rates once per quarter in 2025.
The mistake would be to wait too long before normalizing monetary policy, as this would increase pressure on a manufacturing sector already in recession.
For the moment, the market has rather well integrated the fact that rates will remain higher: from 7 rate cuts for 2025 in October, the market now only forecasts 3 rate cuts for 2025.”
