Payden & Rygel: FOMC '... could happen sooner than you think'

Payden & Rygel: FOMC '... could happen sooner than you think'

30 januari 2025

Verenigde Staten Fed
Federal Reserve (2).png

The U.S. central bank kept rates steady in January, but the next move is still lower--and it could happen sooner than you think. Payden & Rygel still believes that the balance of risks tilts toward a lower fed funds rate over the course of the year.

First, the labor market has cooled, and the unemployment rate has stabilized near 4%. But as Chair Powell stated, the Fed does not seek or think necessary any further deterioration in labor market conditions. While the U.S. has enjoyed a solid string of jobs readings of late, it’s possible job growth will slow over the balance of 2025. In addition, it’s rare to see a stable unemployment rate; usually, the unemployment rate is falling gently or rising quickly. Stability over a 12-month time horizon is less probable. All else equal, any additional slowdown in hiring then will likely put upward pressure on the unemployment rate. As Powell advised during the press conference: "If the Labor Market were to weaken or fall more quickly than anticipated, we can ease policy accordingly." He also reminded the press corps, “We don’t need to see a further deterioration in the labor market to achieve our inflation goal.” Payden & Rygel notes that these factors suggest the possibility of a policy shift if conditions change more rapidly than expected.

Second, Payden & Rygel sees scope for core inflation to continue to moderate in 2025, perhaps more quickly than many investors currently expect. The housing component of PCE has been elevated and sticky, a key factor keeping core inflation above the Fed’s target. Readings from November showed housing recorded its softest monthly increase since more than three years. If such trends persist, the 12-month trailing core PCE could reach 2% later this year. Powell highlighted the 12-month trailing reading as the key measure to watch to see whether the Fed is approaching its 2% target. In Powell’s words, the Fed doesn’t need to get to 2 to cut again, but needs to see steady progress in that direction. Payden & Rygel emphasizes that this moderation in inflation may come faster than expected.

Third, policymakers, while happy to pause in January, still see the neutral policy rate as “meaningfully” lower than the current setting. Therefore, monetary policy is still restrictive, exerting a drag on growth and inflation. As Payden & Rygel observes, if there are any unwelcome wobbles in the labor market and/or inflation moderates more quickly than anticipated, the bias will be to continue cutting rates from the current 4.30% levels.

The bottom line, according to Payden & Rygel, is that we don’t view January’s rate pause as the end of the cutting cycle. It’s likely overnight rates will be quite a bit lower in a year’s time as inflation moderates to target and/or the labor market continues to soften.

Gerelateerde berichten