Source: Wall Street See
Author: Zhang Yaqi.

It is almost certain that the Federal Reserve will cut interest rates on Friday, but the contradictions and unstable economic data, as well as the policy uncertainty after Trump's victory, have made the future rate-cutting path full of variables.

The market widely expects that the Federal Reserve will continue its easing cycle in November. All analysts expect the Fed to cut interest rates by 25 basis points, which is highly consistent with the pricing in the money markets, with a certainty of 99.8%.

Due to the presidential election on the 6th, the Federal Reserve's policy announcement has been delayed for one day and will be released at 3:00 am Beijing time on Friday. Powell will hold a press conference at 3:30 am.

Looking ahead at the future rate-cutting path, as Trump's policies are widely seen as inflationary, the market is pricing in less than 50 basis points for the November and December meetings.

Analysts believe that the Fed's statement is expected to emphasize that economic risks are "roughly balanced," and will maintain flexibility on future interest rate paths. The market will closely watch Chairman Powell's speech, especially his views on the potential impact of Trump's policies. Powell may reiterate the Fed's stance of flexibly adjusting policies based on data.

After the interest rate cut in September, the economic data is mixed.

The US GDP performed strongly in the third quarter, with economic activity continuing to expand, and core PCE inflation easing significantly over the past year.

However, the situation of adding 0.012 million new jobs in October has raised concerns in the market. Although the data was mainly affected by hurricanes and strikes, the Bureau of Labor Statistics pointed out that the exact impact of such events cannot be quantified.

Citi believes that Fed Chair Powell may maintain a dovish stance in his upcoming speeches, implying further rate cuts, but will also stress data dependency to keep policy adjustments flexible for the future.

The market expects that in the press conference after the interest rate decision, Powell will acknowledge the strong GDP growth and job numbers in the third quarter. Compared to the previous meeting, he will no longer excessively emphasize economic slowdown. It is expected that Powell will not provide specific guidance on the size or pace of future rate cuts. Policy will still depend on data, and the 50 basis points cut in September and 25 basis points cut in November do not predict the future pace.

Trump's policies may increase inflation.

Many analysts believe that Trump's proposed policies, including raising import tariffs and additional tax cuts, may reignite inflationary pressures, with these policies being more inflationary than Harris's policies. Therefore, a Trump reelection may significantly hinder the Fed's accommodative path.

Bank of America expects that the outcome of this US election will have a significant impact on the Fed's future monetary policy. It is expected that Powell may emphasize in the upcoming press conference that the Fed will continue to make decisions based on data and maintain its established policy path, rather than making extensive comments on the policy agenda of the next administration.

However, the bank believes that if the new government implements further fiscal expansion policies, the Federal Reserve may have to raise the federal funds rate target to a higher level in order to address potential inflation pressures.

Michael Feroli, Chief U.S. Economist at JPMorgan, stated in an interview:

"For Friday, considering Trump's policies makes no sense, and may not be significant for December. However, after December, the situation will become more complicated."

The Federal Reserve cannot know which policies proposed by Trump will be implemented, nor in what order they will be implemented, but just this uncertainty is enough to make officials more cautious. When you are more uncertain, you may need to slow down.

It is worth noting that since the Fed's first rate cut in September, the yield on the 10-year US Treasury bonds has risen by 80 basis points, implying that the market believes the Fed is making another policy mistake, triggering inflation through loose policies.

How will the future easing path look like? Wall Street is cutting back on rate cut bets.

90% of analysts surveyed by Reuters believe that the Fed will cut rates by another 25 basis points in December; by next year, the federal funds rate target will be reduced to 3.00%-3.25% or higher. The money market currently expects the Fed to cut rates by around 43 basis points by the end of the year, which means there will be at least one rate cut of 25 basis points, with an 80% chance of another rate cut.

HSBC predicts that in the next six FOMC meetings (including November and December 2024, as well as four meetings in early 2025), there will be a 25 basis points rate cut each time, lowering the federal funds target rate range to 3.25%-3.50% by June 2025.

However, after Trump was elected President of the United States, some Wall Street banks lowered their bets on future rate cuts by the Federal Reserve.

JPMorgan economist Michael Feroli adjusted his forecast for the Fed's interest rate path, writing in a report on Wednesday that the Fed may cut rates by 25 basis points at both this month's and December's meetings, and then start cutting rates quarterly from March next year, i.e., only once per quarter, until the federal funds rate reaches 3.5%.

JPMorgan believes that Trump's ability to reshape the Fed may only slowly materialize over time.

Nomura's David Seif and other economists continue to predict that the Fed will cut rates twice by 25 basis points this year. However, their expectations for Fed rate cuts next year are quite pessimistic, with the latest forecast suggesting only one cut next year, far below their previous expectation of four cuts next year. Nomura has raised its terminal rate forecast for Fed rate cuts by 50 basis points to 3.625%.

Editor/rice