The latest statements from the Fed Chairman – Mr. Jerome Powell – are making the global financial market worried about the agency’s interest rate roadmap.
Nomura: The FED will need more time to lower interest rates
Japanese financial group Nomura believes that the FED will not rush to lower interest rates next month. With this assessment, Nomura has become the first brokerage firm in the world to predict that the FED will pause its monetary policy easing after the recent presidential election.
Nomura currently predicts that the FED will need more time. December is not the right time to cut interest rates again. The earliest interest rate cut will be in March next year, with a reduction of 25 basis points. This agency also predicts that there will only be one more cut in June 2025, then a pause until March 2026.
According to CME Group’s FedWatch Tool, traders now see a 34.7% chance that the Fed will pause its rate cuts in December, down from more than 80% last week.
Explaining the Fed’s forecast of no further rate cuts
Investors’ expectations of a rate cut from 80% to nearly 35% after just one statement from the Fed Chairman suggest that Nomura’s latest comments are understandable. But persistent US inflation is the problem that is causing headaches for the Fed at the moment.
The caution is justified as inflation data released last week showed that both the US consumer price index (CPI) and the producer price index (PPI) increased slightly.
The US CPI rose 2.6% in October, the first time since March that annual inflation increased compared to the previous month. The PPI index increased by 2.4% – the highest level in 4 months. Obviously, the inflation indicators are the direct cause of the FED’s concern.
But the underlying cause, according to Wall Street, is the new US administration’s proposals to impose strong additional tariffs of 10 – 60% on imported goods. If implemented, this plan could accelerate inflation by up to 1 percentage point, bringing annual inflation to about 3.6%, much higher than the FED’s target.
The above developments immediately reflected in the currency market. If last week, the USD increased sharply by 1.6%, then in the first session of the week in the US, the Dollar Index – a measure of the strength of the greenback against other major currencies – turned down, down to 106.2.
This week, at least 7 FED officials will speak. If they are inclined to support the FED’s slow rate cut, CNBC predicts that the USD will continue to weaken.
Fed’s December Rate Path Forecast
Boston Fed President Susan Collins told Bloomberg TV over the weekend that she doesn’t see a big need to cut rates at the December 18 meeting.
Boston Fed President Susan Collins said: “The Fed doesn’t have a predetermined path and so we’re going to look at the data and see what makes sense.”
Richmond Fed President Thomas Barkin told Yahoo! Finance that he liked what Dallas Fed President Lorie Logan said earlier this week: A captain should “slow down as you approach the dock.”
The Chicago Fed President echoed the sentiment on CNBC.
“If Fed officials cannot agree on a neutral interest rate now, it makes sense to start slowing the pace of achieving that target,” said Austan Goolsbee, president of the Federal Reserve Bank of Chicago.
The neutral interest rate is the state of interest rates that neither stimulate nor slow down the economy. It is the point where growth and inflation are in balance. Too low, the economy can overheat; too high, growth stagnates.
So what is the neutral interest rate that the Fed sets? We only know that the current interest rate is at 4.5 – 4.75%.
