In September, the market widely anticipated that the Federal Reserve would cut interest rates by 25 basis points in both November and December. However, with recent economic data and political developments, analysts now highlight the growing uncertainty surrounding the Fed's interest rate path.
Attempting to prevent the previous two and a half years of significant rate hikes from unnecessarily hindering economic growth, the Federal Reserve approved a 25 basis point rate cut. However, they indicated more uncertainty about the pace of future cuts.
The market has reduced bets on a December rate cut. The CME's FedWatch tool shows a 32% chance of rates remaining unchanged in December, a significant increase from 14% a month ago.
Federal Reserve Chair Jerome Powell stated that the U.S. elections would not immediately impact the Fed's decisions. He emphasized that predicting how future government policies might reshape the economic landscape is premature.
According to Citigroup data, investors in the interest rate futures market have steadily lowered their expectations for the Fed's rate cuts over the next year. They now foresee rates dropping to around 3.6% by 2026, down from September's estimated low of 2.8%.
Fed officials are striving to restore rates to a "normal" or "neutral" level that neither stimulates nor restricts economic growth, though what constitutes a normal rate remains uncertain.
Looking further ahead, uncertainty increases. The long-term economic projections released during the Fed's September meeting indicated that 19 policymakers expect rates to fall between 3.25% and 3.5% by the end of 2025, translating to a cumulative cut of 100 basis points in 2025 and 50 basis points in 2026, maintaining rates between 2.75% and 3% long-term.
Since September, the economy has improved significantly, according to Powell. He mentioned that economic activities, including non-farm payrolls, retail sales, and revised data from the U.S. Bureau of Economic Analysis, have exceeded expectations.
With many factors still to consider before the December meeting, KPMG's Chief U.S. Economist, Diane Swonk, highlights the necessity for the Fed to remain flexible in its policy decisions.
Powell suggests it might be appropriate to slow the pace of monetary easing as they near a neutral rate level. Next year's monetary policy must also account for potential impacts from fiscal policies spurred by Trump, which could take time to manifest economically.
