With the second interest rate cut by the Federal Reserve this month, the policy outlook for the year-end closing meeting unexpectedly changed significantly last week.
The latest data shows that the US economy is resilient and price pressures have increased. The statements of several Federal Reserve officials, including Powell, have also made the future path of easing uncertain. Nomura Securities predicts that the Federal Reserve will remain inactive in December, becoming the first major institution to make a similar forecast. At the same time, the outside world's predictions for this round of easing cycle continue to diverge as Trump approaches office.
Nomura: The Federal Reserve will cut interest rates twice next year
Nomura Securities released a research report stating that it is expected that the Federal Reserve will no longer cut interest rates at its December policy meeting. Amid sustained economic growth and the possibility of further inflation, recent hawkish rhetoric from policy makers indicates that the Federal Reserve is not in a hurry to cut interest rates.
Meanwhile, the institution predicts that the Federal Reserve will only cut interest rates by 25 basis points twice at its meetings in March and June 2025, resulting in a median federal funds rate range of 4.125%.
Since the fourth quarter, the yield of medium and long-term US Treasury bonds has continued to rise, with the benchmark 10-year US Treasury bond increasing by nearly 90 basis points cumulatively. In the major economic indicators released last week, US retail sales in October were stronger than expected, indicating that consumer spending is expected to continue providing important support for the US economy's soft landing. The previously sluggish New York State Manufacturing Index unexpectedly rebounded sharply. At the same time, the Consumer Price Index (CPI) and monthly import rate index rose in October, indicating that inflationary pressures may be brewing again.
On the other hand, after the Republican Party swept through both houses of Congress and the dust settled on former President Trump's return to the White House in the US presidential election, expectations of a major change in government policy are gradually fermenting. The stance of reducing taxes, raising tariffs, and cracking down on immigration may lead to a resurgence of inflationary pressure, thereby facing greater resistance to further easing monetary policy.
Nomura Securities stated in the report, "We currently anticipate that tariffs will drive up real inflation rates in the summer, and policy risks tend to be suspended earlier and for a longer period of time
According to the FedWatch tool of the Chicago Mercantile Exchange Group, traders now believe that the probability of the Federal Reserve cutting interest rates in December has fallen below 60%. Nomura Securities predicts that after a possible interest rate cut in June, the United States will temporarily suspend further easing until March 2026.
Neutral interest rate expectations rise
The outside world has noticed that Federal Reserve officials seemed to have raised the possibility of delaying another interest rate cut in December last week.
Federal Reserve Chairman Powell stated that the Federal Open Market Committee (FOMC) does not need to rush to cut interest rates, as the strong economy gives the Fed room to act cautiously and relies on data and other information. He reiterated his previous statement that the FOMC will consider fiscal policy as a factor in its decision-making, but will not speculate on it until fiscal policy decisions are made.
Boston Fed President Collins revealed that the December interest rate cut is not a certainty and will be guided by economic data. "I do believe that the policy stance is restrictive, and over time, I think the normalization of this policy stance will be important to carefully evaluate the data and make decisions on pace and timing
Coincidentally, Dallas Fed President Logan and Minneapolis Fed President Kashkari believe that it is too early to decide on monetary policy for the December meeting.
Bob Schwartz, Senior Economist at Oxford Economics, previously stated in an interview with First Financial News that inflation in October may be an important signal that will affect the Federal Reserve's economic forecast for December, particularly neutral interest rates and consumer personal expenditure (PCE). With the upcoming inflationary changes in fiscal, trade, and immigration policies, the risk of the Federal Reserve adopting a wait-and-see attitude earlier in 2025 is increasing.
The pricing of interest rate futures shows that the path to 2025 is full of uncertainty, and the Federal Reserve may only cut interest rates three times, reaching the end of this easing cycle at the end of the second or third quarter.
The first financial reporter found that there is a significant divergence in institutional forecasts. TD Securities expects that as central bank policy makers evaluate the impact of Trump's policies, the Federal Reserve will pause interest rate cuts in the first half of 2025. In contrast, Goldman Sachs believes that the Federal Reserve will cut interest rates by 25 basis points at each meeting before March next year, with the final action taking place in June and September. Barclays Bank has raised its inflation forecast for next year and lowered its GDP forecast. It is expected that the Federal Reserve will cut interest rates twice in 2025,
It is worth mentioning that monetary policy expectations have continued to push up US bond yields in the near future, with the benchmark 10-year US Treasury briefly breaking through the key resistance level of 4.5% last week, causing significant selling pressure on US stocks. Mark Hackett, head of investment research at Nationwide, said, "The rise in bond yields is a headwind, and the uncertainty of the Fed's policy path is increasing." He further stated, "As Fed Chairman Powell has pointed out, the macro environment remains resilient, and his remarks have scared investors