AXA IM: Close call but Fed will ease with 25 bps on Wednesday

September 16, 2024

Interest Rates Fed

'We find some additional reasons in last week’s data flow to stick to our 25 bps (close) call', writes AXA Group Chief Economist and Head of AXA IM Research Gilles Moëc in his latest Macrocast.

According to Moëc, the risk of inflation undershooting remains low despite manageable economic headwinds. Headline inflation for August was 2.5% YoY, down from 2.9% in July, but core inflation stayed high at 3.2% YoY, with a monthly increase of 0.3%, higher then expected.

'Nothing to write home about' at first glance since services ex rents continue to decelerate gently in year-on-year terms. 'On a 3-month average though, a rebound emerges, visible on most sub-categories of the index. That is no reason to postpone the cut in our view, but this could give a valid argument to those who oppose a 'big move' at this week’s meeting', Moëc writes.

He adds that while the CPI print isn't the final data before the FOMC's decision, with retail sales for August due on Tuesday, it would take an exceptionally poor result to influence the committee significantly, given the continued strength of consumer spending.

'More fundamentally, the best argument in our view for a 50-bps cut this week is that the Fed has pushed its policy rates very high relative to any reasonable estimate of the neutral rate. This gives the Fed ample room for manoeuvre to 'cut big' – thus sending a reassuring message to the market and economic agents at large about its readiness to stand in the way of a nasty downturn – without taking a big risk of rekindling inflationary pressure,' Moëc says.

'This makes our call for Wednesday a close one', Moëc concludes. 'But we stick to our view: that inaugurating the easing phase with 50 bps would send a difficult-to-control ultra-dovish message, sending market pricing even further down for the whole Fed trajectory, even if the FOMC tries to offset this by pencilling in a comparatively small number of additional cuts in the new 'dot plot'.'