Below you will find a new commentary by Xiao Cui, Senior Economist Pictet Wealth Management, on the FED.

We now expect a delayed and a shallower Fed easing cycle

• Recent developments of elevated inflation, robust payrolls, and easing financial conditions strengthen the case for a policy hold. The door is closing on a rate cut as early as June, barring a sharp turnaround in the inflation data. We now expect two 25bps rate cuts this year, in July and December. This is a delayed start and a shallower path to the Fed’s easing compared to our earlier forecast of a June start and 125bps of easing, a view we had held throughout volatile markets pricing in the past six months.

• The timing of the first cut hinges critically on the inflationary trajectory and it is a close call between July and September. The inflation path will be bumpy, but we expect core PCE inflation to slow and the 6m annualised reading to start improving by the July FOMC meeting. The Fed likely prefers to make policy changes at meetings with updated economic projections (Jun/Sept/Dec). However, this must be weighed against the risk of delaying until September, the last meeting before the presidential election.

• We continue to expect a measured pace of rate reductions in 2025 and a terminal rate for this cutting cycle above the Fed’s median neutral rate estimate of 2.6%.

• Risks are two-sided. If inflation proves stickier than our forecast, the risk of even fewer cuts or no rate cut at all this year would rise materially. We think the bar is extremely high for a future hike though, as it would take a strong acceleration in inflation, not just inflation being stuck above target, to justify a hike.

• We also expect the Fed to be more sensitive to labour market weakness than strength. Recent immigration has helped boost job gains without generating wage pressures. However, if visible cracks start to show in the labour market, the Fed would react quickly by cutting rates more than expected.

• We continue to expect a tapering of QT, a slowdown in the pace of the Fed’s balance sheet runoff, to be announced at the May FOMC meeting. This is a technical concern and should have little bearing on its interest rate policy.