Fed : 25 basis points in sight

By Volker Schmidt, Portfolio Manager at Ethenea

Currently, market prices are reflecting expectations of 9 rate cuts by the Fed by June 2025. The market participants’ expectations are therefore well ahead of statements and projections from central bankers. In the latest dot plot from June, the Fed was forecasting a small rate cut for 2024. Since then, however, the sentiment has shifted. At the Jackson Hole meeting, Jerome Powell stated that the time for rate cuts has come. Furthermore, he emphasized the importance of the labour market, saying he will not tolerate further weakening. We are certain that the Fed will cut rates by 25 basis points at the upcoming meeting. The dot plot will certainly be adjusted, but not to the extent that it reflects market expectations.

A 50 basis point cut to the federal funds rate in September would need to be carefully justified. Otherwise, it could be interpreted as a sign that the labour market and the U.S. economy are weakening more than the central bank had anticipated. The Fed will surely want to avoid giving that impression. So far, the U.S. economy has been creating new jobs at a steady pace, but the pace is no longer sufficient to provide employment for all those willing to work. This is why the unemployment rate in the U.S. has recently risen to 4.2%.

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