Don’t anticipate a Fed rate cut in the immediate future; some predict a rate hike could be in the offing
Once more, it’s Federal Open Market Committee (FOMC) meeting week, and Chairman Jerome Powell is likely to again let the White House down by announcing a hold on the base interest rate.
How strongly the Oval Office will react is anyone’s guess, but markets are pretty certain that the two-day meeting ending tomorrow will keep the interest rate steady in the 3.5% to 3.75% range. According to CME’s , there’s only a 2.8% chance of a cut tomorrow, even the smallest 25 basis points.
But while investors have reached a general agreement on the outcome of this week’s discussions, they aren’t as unified on the fiscal path for the rest of the year. Many economists have for some time been expecting .
Their reasoning points to a weakening labor market and relatively low transmission so far from the White House’s tariff policy. Moreover, Chairman Powell will be replaced in spring by a candidate nominated by President Trump, who has already stated he wants a dovish person leading the Fed.
Dissenters to that view include investment bank Macquarie, where and Chinara Azizova see the Fed’s —potentially in the last quarter of this year.
“At the core of this is our belief that the labor market is improving and unemployment will trend downward,” the pair wrote in a note seen by this week. “A key risk to this view is the possibility of a incoming Fed Chair steering the committee in a more dovish direction. However, we think this risk is lessened by a potential shift in the new Chair’s incentives once they take up the role.”
Their view is strengthened by the idea that the Fed may have reached the stage of “normalization” of the base rate. In the years after the pandemic, America’s base rate soared to as high as 5.5% to get rampant inflation under control. This then raised questions about how the Fed would “land the plane” and reduce price increases without pushing the economy into a recession—a task it accomplished.
However, since the base rate was around 0.25% in the years before the pandemic, speculators widely expected interest rates to trend down back towards pre-pandemic levels and stabilize around the 2% mark.
Questions are now increasing regarding the damage caused by the exceptionally low rate and whether the neutral rate should be a bit higher. As the pair wrote: “The continued strength of the U.S. economy and ongoing inflation above the 2% target raise the possibility that the neutral rate may be higher than many at the Fed previously thought. This could be a topic the Chair addresses in his press conference.”
Consensus view
More broadly, analysts expect the base rate to trend downward this year. For example, Goldman Sachs’ David Mericle wrote to clients this week that he had scheduled a 25bps cut in June, followed by a final cut in September to 3-3.25%.
He cautioned: “Further cuts will be less pressing if the labor market stabilizes, as we expect, and it will likely take some time for inflation to fall enough to create a strong consensus on the FOMC to cut again.”
Meanwhile at , analysts Mark Cabana, Aditya Bhave, and Alex Cohen wrote that while Powell was likely to revert to his “wait and see” approach, they didn’t see that leading to a hike in the future.
“The labor market is weak and inflation is high. Both are stable, so the risk balance hasn’t changed,” they stated. “With policy now much closer to the Fed’s assessment of neutral, there’s no rush to act. Especially since the economy is about to get a large dose of fiscal stimulus.”
On a hike—whether due to inflation spiking or the labor market improving—they added this would be the “biggest surprise,” adding: “We doubt the FOMC currently seeks that flexibility.”