AXA IM: Fed to cut 25bp this week and maybe just once in 2025

AXA IM: Fed to cut 25bp this week and maybe just once in 2025

16 december 2024

Rente Fed
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As a 25bp cut by the Fed is widely expected this week, the market is going to be focused on any message on the future trajectory, writes AXA Group Chief Economist and Head of AXA IM Research Gilles Moëc. “The Fed cannot avoid providing some forward guidance since it will release a new set of forecasts, including a ‘dot plot’”, Moëc says, adding that the market expect three cuts in 2025.

 

FOMC will raise rate forecast by the end of 2025 with at least 25bps

“A complication is that the FOMC communicates on a rate level at the end of each year, not on a proper trajectory, but the September batch was consistent with once cut per quarter. In principle, this would already fit the message from several FOMC members who over the last few weeks have stated that the central bank is near the point when it needs to slow down the pace of ‘restriction removal’. Yet, taking on board the resilience in the economy, the latest inflation prints, and quite simply where the market expectations pricing already is, we think the FOMC raise its rate forecast by the end of 2025 by 25bps at least,” Moëc states.

Fed to skips at least one quarter in descent to neutral

“We would expect them to maintain a downward path subsequently but hitting their forecasted long-term level for Fed Funds (currently 2.9%), a good proxy for the neutral rate, in 2027 instead of 2026. In other words, we expect the Fed to telegraph that it intends to skip at least one quarter in their descent to neutral and move more cautiously in this direction. Another way for the Fed to telegraph a more prudent attitude towards easing would consist in raising – once again – their estimate for the long-term level of Fed Funds in the forecast,,” he explains.

“Skipping January – at least – will give the FOMC time to evaluate the first policy announcements by the incumbent administration. For our part, we think the combination of spontaneously resilient inflation and quick decisions from the Trump administration in the field of international trade and immigration will ultimately allow the Fed to cut only once in 2025, in March,” Moëc adds.

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