Fed Cut Rates 25bps But See Rates Being Held for Longer Next Year

Thought for Thursday

“Christmas is a season not only of rejoicing but of reflection. Let's take this time to appreciate our achievements and set our sights on new goals.” — Winston Churchill

Fed Cut Rates 25bps But See Rates Being Held for Longer Next Year

Yesterday evening, the Federal Reserve met market expectations in cutting rates by a further 25bps, representing the third cut in the central bank’s present cycle. The cut brings the Fed’s benchmark rate down to a 4.25%-4.5% target range, one percentage point below the highs experienced over the summer when borrowing costs were at their highest level in 22 years.

Notwithstanding the rate cut – which had been almost fully priced in by the markets – the dollar gained momentum on the release of the dot plot given that policy makers are now expecting just 50bps worth of cuts over 2025. This is a sharp reduction from their last dot plot where the FOMC members were expecting to see 100bps of cuts for 2025, indicative of how policy makers now see rates being held higher for longer.

The dollar gained further strength with the Fed upwardly revising their GDP expectations. Here, the central bank now see growth of 2.5% this year (a 0.5 percentage point increase from their prior projection) in addition to 2.1% growth next year (a 0.1 percentage point increase from their prior projection).

Additionally, the Fed upwardly revised their PCE expectations – the central bank’s preferred gauge of inflation. Here, the central bank now see the index registering 2.4% this year (a 0.1 percentage point increase from their prior projection) and 2.5% next year (a 0.4 percentage point increase from their prior projection).

As we looked at yesterday, the decision to cut 25bps follows the latest US inflation figures indicating that headline inflation (annualised CPI) rose 10bps over the course of October. It was also a similar story with PCE – the Fed’s preferred method of gauging inflation – which also rose 20bps between September and October.

Accordingly, the FOMC telegraphed that “Recent indicators suggest that economic activity has continued to expand at a solid pace. Since earlier in the year, labor market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made progress toward the Committee's 2 percent objective but remains somewhat elevated.”

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BoE

At 1200 noon today, markets will turn their attention to Threadneedle Street where the Bank of England are widely expected to hold their benchmark policy rate at the current 4.75% level.

The exception to hold comes in the wake of their July and November meeting’s, both of which concluded with a 25bps rate cut. During their November meeting MPC members expressed how “there has been continued progress in disinflation, particularly as previous external shocks have abated”. Nevertheless, they cautioned that “remaining domestic inflationary pressures are resolving more slowly.” As such, they indicated that “a gradual approach to removing policy restraint remains appropriate”.

Since this November meeting, CPI showed signs of rising to 2.6% marking its highest level in eight months while core inflation (at 5.1%) surpassed the BoE’s expectations of 4.9%, indicative of how inflationary pressures remain.