Goldman Sachs Chief Economist Jan Hatzius still believes that the Federal Reserve will deliver on its earlier hints of two rate cuts before the end of the year, especially after releasing a weaker-than-expected employment report last week. He expects this situation to continue in the first half of 2025.

In a report released last Sunday, Hatzius stated, "We expect the Federal Reserve to make four consecutive rate cuts in the first half of 2025, with the final rate dropping to 3.25%-3.5%. However, we have greater uncertainty about the pace and ultimate target of next year's rate cuts compared to market consensus," he added that his forecast is about 50 basis points above market expectations.

He is also uncertain whether the Federal Reserve will gather enough information to alter its course before next year. He said, "Potential fiscal policy changes after the elections are another risk to the Fed's course. Even though this may be further in the future, the Federal Open Market Committee (FOMC) that formulates policy might prefer to wait for more clear information about actual policy changes that will be taken before revisiting their economic outlook and rate-cutting plans."

Of course, the job market is slowing down, with the average monthly increase in employment since January down to 0.156 million people as of September, lower than the 0.182 million people from January to May, even without the impact of last week's hurricanes and strikes.

Nevertheless, given the U.S. GDP growth rate of 2.8% in the third quarter, an unemployment rate of 4.1%, and corporate profits continuing to grow at nearly double-digit pace, the likelihood of the world's largest economy experiencing a "no landing" scenario is greater than any near-term recession risks.

TradeStation's Global Market Strategist David Russell commented after the U.S. released the GDP report for the third quarter last week, "Goldilocks is coming, inflation is becoming a thing of the past, the economy is reverting to form, consumption is strong, and prices are mild."

Unexpected Risk: Can Powell Save His Job?

That being said, one unexpected risk in the Federal Reserve's interest rate setting process next year is the fate of Jerome Powell himself, who was appointed by former President Donald Trump and was reappointed during President Biden's term. His current term is set to end in May 2026.

Trump has said he will not fire Powell. However, he also stated that if he wanted to do so, he could (a viewpoint rarely confirmed by legal scholars), and earlier this year he insisted that the president should have "at least some say on monetary policy."

Speaking at a press conference held at his Mar-a-Lago estate in Palm Beach, Florida, he told reporters, "I've made a lot of money myself. I've been very successful. I think I have a better intuition than a lot of the Fed members or chairmen in many cases."

In such a scenario, market predictions of the long-term interest rate path (in this case, borrowing increasing to pay for promised tax cuts, while growth may slow due to the pressure of record tariffs on imported commodities) would be difficult even in the best-case scenario.

Furthermore, the fate of the tax cut policy implemented in the Tax Cuts and Jobs Act of 2017 will also be tested, as the policy is set to expire next year and will face a significant battle in Congress for an extension.

The Federal Reserve is still pushing for interest rates.

A president who is eager to express opinions on interest rates or attempts to dismiss the Federal Reserve chairman himself will make predicting the Federal Reserve's near-term interest rate path nearly impossible.

Mike Goosay, Chief Investment Officer for Global Fixed Income at Principal Asset Management, does not share the same view. He believes that as the Federal Reserve continues to maintain a dovish stance, the bond market will strengthen.

He said, "Ultimately, although the election results will lead fixed income investors to readjust their positions in the short term, inflation and labor data will continue to drive the Fed to take action in the medium to long term, and should support further rate cuts as the Fed eases restrictions."

Goosay added, "We believe that the recent rise in US bond yields and the potential for yields to rise further to some extent due to the election results provide an attractive entry point for fixed income, in addition to the favorable initial yield, fixed income will also benefit from the duration bullish brought by the Fed rate cuts."

Editor/Rocky