US Fed to play ‘cut-and-pause’ for meeting dual mandate of growth & inflation; Fewer rate cuts eyed in 2025: Experts
- US Fed rate cuts: The US central bank will conduct its two-day FOMC meeting amid Wall Street bets that will likely stay on course towards delivering another interest rate cut next week.
The US Federal Reserve will begin its deliberations for the latest monetary policy decisions on Tuesday, December 17, and will announce its new benchmark interest rate decision on December 18. The US central bank will conduct its two-day Federal Open Market Committee (FOMC) meeting amid Wall Street bets that will likely stay on course towards delivering another rate cut even after the latest inflation print of November revealed that consumer prices rose the highest in the last seven months.
US inflation accelerated for a second consecutive month in November 2024, reporting a steep amid higher food prices and other sectors. The data proved consumer prices rose slightly higher last month, the latest sign that price pressures in some sectors are elevated in the world's largest economy.
US consumer price index (CPI) rose to 2.7 per cent from a year ago, up slightly from 2.6 per cent in October, said to be in line with economists' expectations. Progress in lowering inflation toward the US central bank's two per cent target has stalled, with the Bureau of Labor Statistics report showing no improvement in the underlying price pressures over the past four months.
Will November's inflation print impact US Fed's decision?
The CPI rose 0.3 per cent last month, the largest gain since April after advancing 0.2 per cent for four straight months. There was some encouraging news despite the high inflation. Rents, one of the stickier components of inflation, rose slowest in nearly 3 1/2 years.
The CPI report showed goods costs, excluding food and energy, climbed 0.3 per cent, the most since May 2023, fueled by household furnishings and apparel segments. The inflation data did not deter Wall Street from placing bets for another interest rate cut by the US Fed, with the policy verdict due next week.
Wall Street has almost fully priced in a quarter-percentage-point rate cut at the US Fed's December meeting, according to CME Group's FedWatch Tool. According to CME FedWatch, the probability of a rate cut next week, as eyed by Wall Street traders, rose to 98 per cent after the inflation report was released. However, some analysts still expect the Fed to be more cautious on cutting than markets expect.
“If the US Fed delivers a rate cut, it will only be to appease the market,” said Nigel Green, CEO of deVere Group. “The data, however, paints a different picture. Inflation is staging a comeback, and it’s stubborn. The US Fed knows it cannot afford to cut rates while prices are climbing and the job market remains resilient.”
“Make no mistake: inflation remains a formidable threat,” said Green. “Neither the US Fed nor financial markets can afford to underestimate its potential impact. Investors must prepare for volatility, adjust their strategies, and focus on assets that can withstand the pressures of a rapidly evolving economic landscape," he added.
In September, the US Fed kicked off its monetary policy easing cycle to cut rates from a two-decade high. The benchmark overnight interest rate currently sits between 4.50 per cent - 4.75 per cent, down three-quarters of a percentage point from September, after hiking it by 5.25 percentage points between March 2022 and July 2023 to tame inflation.
US Fed to play ‘cut-and-pause’ in 2025: Experts
This will be the last US Fed decision before President Joe Biden hands the White House to incoming Republican Donald Trump. Economists expect policymakers to signal fewer cuts in 2025. Low inflation is forecasted for 2025 as rent costs cool and the labour market slackens. However, it could be offset by higher tariffs and deportation of immigrants, which Trump promised.
According to Garima Kapoor, Economist at domestic brokerage Elara Securities (India) Pvt Ltd, the US Fed will likely play a ‘cut-and-pause’ game in 2025 to meet its dual mandate of keeping US inflation under control and supporting the overall economic growth.
'The moderation in US inflation from Q2 and mid-CY25 is set to start the next phase of the cut cycle. We expect a 50 bps cut in CY25E, pushing the Fed funds rate to 4.00-4.25 per cent, which serves two purposes: 1) puts the rates closer to neutral, and 2) aids the US Fed to balance upside from tariff risks and capping inflationary impulses as well as keeping the growth intact," said Kapoor.
Last week, US Fed Chair Jerome Powell suggested that the Fed could slowly reduce its key rate while maintaining a healthy economy. “We’re not quite there on inflation, but we’re making progress,” Powell said. “We can afford to be a little more cautious.” Powell said the central bank is seeking to “recalibrate” its rate to a lower setting, one more in line with tamer inflation.
US Fed officials have clarified that they expect inflation to fluctuate along a bumpy path even as it gradually cools toward its target level. In speeches, several of the central bank’s policymakers stressed that inflation had already fallen so far that keeping their benchmark rate quite as high was no longer necessary.
While price pressures have subsided from a peak seen during the pandemic recovery, progress has levelled off more recently, prompting several central bankers to call for a more gradual pace of cuts. At the same time, economic growth has been robust, giving the US Fed an excuse to pause rate cuts in the coming months to see how its fight against inflation unfolds.
Typically, the US Fed cuts rates to stimulate the economy and maximize employment but not so much to drive inflation high. However, the US economy grew at a solid 2.8 per cent annually in the July-September quarter, bolstered by consumer spending. That has led some analysts to suggest that the Fed does not actually need to cut its key rate further in the near term.
Disclaimer: The views and recommendations provided in this analysis are those of individual analysts or broking companies, not Mint. We strongly advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and individual circumstances may vary.
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Business NewsEconomyUS Fed to play ‘cut-and-pause’ for meeting dual mandate of growth & inflation; Fewer rate cuts eyed in 2025: Experts
First Published:14 Dec 2024, 07:49 PM IST
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