La Française: Pre Fed, a widely anticipated cut

By François Rimeu, Senior Market Strategist, Crédit Mutuel Asset Management Federal Reserve Chairman Jerome Powell is expected to announce a 25 basis point (bp) rate cut at the final monetary policy meeting of 2024, bringing key interest rates from 4.50% -4.75% to 4.25% -4.50%. While this move is unlikely to catch markets off guard, the Fed’s communication on the potential pace of rate adjustments in 2025 could be more surprising. This meeting will also feature updates on macroeconomic forecasts and the dot plot, which is still very closely scrutinized by markets.

Please see below our expectations:

A 25 bp rate cut to reduce rates to a 4.25% -4.50% range. The Fed should justify this decision by dwindling inflation risk, despite core inflation still above its target, even over an annualized 3-month period.

Growth forecasts for the US are expected to remain unchanged except for a slight increase from 2% to 2.1% in 2025.

Inflation forecasts should see a slight upward revision in 2025 to 2.2% vs. 2.1%. We do not expect any changes in 2026 nor 2027.

The unemployment rate is expected to remain stable at around 4.2%-4.3% in 2025-2026, slightly lower than expected in September.

Finally, dots should be reviewed as follows:

2025 is expected to show only 3 cuts compared to 4 previously;

- The pace for 2026 and 2027 should remain unchanged (2 cuts in 2026, no cuts in 2027);
- The long-term dot is anticipated to rise by 12.5 bps to 2.87% -3.12%.
- Lastly, Jerome Powell should announce a 5 bp cut in the reverse repo rate.

Ultimately, Powell's communication will most likely be in line with previous meetings. The strength of the US economy and the stability of the labor market should drive the above revisions but should not dramatically change the Fed's message. If the communication is successful, the impact on bond markets should be quite marginal.