Interest Rate Forecasts

Recent data releases give the green light to a September interest-rate cut from the US Federal Reserve, in my view, and the latest job market report was the likely clincher. While inflation is not yet back to target, it remains within striking range, and the Fed is likely to take comfort from signs of cooling of wage growth.   As could be expected at such a meaningful turning point, a number of investors and analysts are rushing to anticipate a sharp policy correction. However, I don’t think these predictions are justified by the current economic outlook. The unemployment rate continues to point to a rather healthy labor market, consumer spending is holding up well, and fiscal policy remains exceptionally loose and seems unlikely to tighten any time soon.   I therefore remain of the view that we will see a gradual easing of policy with rate cuts totaling somewhere around 125-150 basis points, leaving the fed funds rate at or above 4%. Over the longer term, I see real short-term rates closer to their long-term 2% average than the near-zero level of the recent past. #fixedincome #investmentstrategy #interestrates #fed #inflation #monetarypolicy

Do’s & Dots The Federal Reserve concludes its two-day meeting today, with markets virtually certain that rates will remain unchanged in the 4.25% - 4.50% range—marking the seventh consecutive month at this level. While the rate decision itself holds no surprises, traders are positioning for nuance. Bloomberg reports that savvy investors have taken long positions, anticipating Chair Powell will adopt a more dovish tone that signals future rate cuts. The real risk lies in the updated dot plot projections. A hawkish shift showing fewer anticipated cuts would likely disappoint both Fed watchers and markets, potentially triggering volatility despite the expected rate hold. Economic fundamentals suggest the Fed will eventually ease policy as growth moderates in the second half of 2025, down from the current 2% pace. The recession narrative has largely faded, with even previously bearish economists revising their outlooks upward. This shift reflects underlying economic resilience that has surprised many forecasters throughout the cycle. For the latter half of 2025, expect GDP growth to decelerate to a more sustainable 1% - 1.5% range—a pace that should provide the Fed with sufficient justification to begin cutting rates without signaling economic distress. When the Fed does resume its easing path, I expect: - Treasury rates to decline approximately 50 basis points over that year, with short-term yields leading the decline as the market prices in policy normalization. - Refinancing activity to accelerate across high-yield and broadly syndicated loan markets as credit spreads tighten and all-in borrowing costs fall. - Corporate earnings growth to initially slow alongside GDP deceleration, then recover modestly once Fed easing begins to support economic activity. - M&A activity to rebound significantly as companies that have been hoarding cash and preserving liquidity regain confidence to deploy capital. - Capital expenditure to increase meaningfully—a long-overdue development that's critically needed. - Housing market activity to strengthen as lower mortgage rates improve affordability and unlock pent-up demand. - Financial and technology sectors to outperform given their sensitivity to funding costs. - Credit market conditions to improve broadly, driving increased demand for private credit while reducing default risks across industry sectors.

JAY POWELL, JOBS AND THE EXPRESS LANE TO A NEUTRAL INTEREST RATE In my latest piece for StoneX Group Inc. with market strategist Kathryn Rooney Vera, I explain why I think the Federal Reserve will move its benchmark interest rate down at a faster pace than planned a few weeks ago. The labor market is paramount, as Fed Chairman Jerome Powell made clear in his Jackson Hole speech last week. I say in the StoneX Group Inc. piece: "The Fed’s goal over the next couple of years is to get the target interest rate back down to something closer to neutral. As Powell has observed, the neutral interest rate is not a fixed or known number, it can only be theorized. Many Fed officials believe it is below 3%, in part based on the recent history of low rates in the post-2008 era. We at StoneX believe it is higher. Whether you think it is 2.9% or 3.5%, almost everyone agrees a neutral rate is much lower than the present rate of 5.33%. That’s what Powell means when he says he has ample room to respond. The Fed is heading toward 3.0% to 3.5% between now and 2026, about two percentage points of cuts. "The big question is how fast it will get there. Powell has now clearly stated the pace of rate cuts will depend importantly on whether the job market cools further. (If inflation re-accelerates, or decelerates faster than expected, that will obviously also dictate the cadence of rate changes.) If the jobless rate rises further, the Fed will move to get to neutral in a hurry. If recession alarms go off – which they haven’t done yet – the Fed might even aim to move below its estimate of a neutral rate, into the 2% range. "At midyear in their Summary of Economic Projections, Fed officials estimated they would get to a neutral rate in 2026. We believe they are now on a path to get there during the second half of 2025 and possibly sooner. The Fed’s updated projections in September will likely indicate as much."

The MPC took another step towards rate cuts today with two members voting for a rate cut. What’s more, the minutes included new guidance that “the risks from inflation persistence were receding” and a lower inflation forecast. This lays the groundwork for the first rate cut to come in the summer. We think June is most likely but it wouldn't take much to push it back to August. We then think will be followed by two more cuts leaving interest rates at 4.5% by the end of the year and at least 4 cuts in 2025. As expected the MPC left bank rate unchanged at 5.2% today. But this was a dovish hold for three reasons. First, Deputy Governor Dave Ramsden joined Swati Dhingra in seeking a reduction in rates making it 7-2. (Ramsden has tended to be a bit ahead of the pack when it comes to changes in direction). Second, the committee added guidance that it will watch the “forthcoming data releases and how these informed the assessment that the risks from inflation persistence were receding.” We interpret this to mean that as long as there are no big upside surprises in the next few data releases, a rate cut will come sooner rather than later. Third, the Bank significantly reduced its inflation forecast. If interest rates follow the path that financial markets are now pricing in, inflation would be just 1.6% by the end of 2026 compared to a forecast of 2% made in March. This is a clear message to financial markets that they have gone too far in reigning in expectations for rate cuts. The upshot is that the Bank is clearly on its way to rate cuts, we think the change in guidance and forecasts are laying the groundwork for the first rate cut to come in summer, probably June but maybe August, it will depend on how the next two inflation and jobs reports turn out. At the very least, every meeting from now on should be considered live. #RSMUK #RealEconomy #MPC #InterestRates

Where will Australian interest rates settle? Here are some key points: - Australia has been a relative laggard in the rate cutting process, compared to our global peers, because core inflation took longer to decline in Australia through 2024. - But, interest rates are likely to fall further this year and the growth threat from tariffs increases the need for rate cuts. We expect the cash rate to decline to 3.6% by the end of this year and to end the cutting cycle at 3.1%. This is higher than average interest rates in the decade prior to Covid. - But the large falls in global sharemarkets from US tariffs and the potential hit to global growth means that larger and faster rate cuts could occur in coming months and a 50 basis point rate cut can’t be ruled out at the May meeting.

Curb Your Enthusiasm Given stronger than expected US growth momentum and ongoing march lower in inflation, we have made a substantial adjustment to our forecast for Fed cuts and interest rates. We still expect the first rate cut in May 2024 and look for the cutting cycle to end at 3% in 2025, bringing rates close to "neutral". We now look for just 5 cuts (for a total of 125bp) in 2024. Cuts are set to continue in 2025, but at a slower pace, with the Fed likely to spread out the last several cuts of the cycle. Despite growth remaining solid, inflation will help determine the starting point for cuts. We look for inflation to decline throughout the year, with core PCE finishing 2024 at 2.3% y/y. The Fed's reaction function remains uncertain, but they desperately want to deliver a soft landing, which will entail lowering rates so as not to overtighten as inflation falls. Given these changes, we now expect 10y rates to finish 2024 around 3.45% and continue to expect the curve to steepen further.   Full note for clients: https://lnkd.in/eNVdTRgD #federalreserve #economy #interestrates #inflation #cpi #growth #pce #cuts #tdsecurities #tdstrategy

It’s a foregone conclusion that the Fed will keep its policy rate unchanged today - but all eyes are on the dot plot… In December, the dot plot, which charts policymakers’ rate expectations, showed a median forecast of three cuts in 2024. It’s possible this could fall to two - which might bring a negative reaction for both #equity and fixed income markets. But regardless of where the dots land, we continue to see an overall healthy outlook for the US #economy and believe the #Fed is in position to cut rates later in the year for a few key reasons – which supports our positive view on both quality bonds and quality stocks: -The Fed is likely to tolerate a couple months of disappointing inflation data as Fed officials have acknowledged the path down to its 2% target will not be a straight line. -The labor market continues to see signs of cooling – with the latest report showing a moderation in average hourly earnings and a higher unemployment rate. -Economic growth has returned to a more sustainable level with the Atlanta Fed GDP tacker coming down to around 2.1%, following the latest retail sales data.

In the end, the Fed rate decision was hardly a surprise. Of course, it could’ve been a different story! At the start of the year, many analysts expected March would be the first rate cut. But the inflation and growth data have been hotter than expected since then. And that ended any hopes of early policy easing. Instead, it’s a ‘no change’ from Mr Powell and team. Three points are worth noting for investors : 1️⃣ First, how far are we from the first cut? At the Congressional testimony a few weeks ago, Chair Powell said “not far”. But he didn’t use that phrase today. Globally, central bankers are now more concerned that the ‘last mile’ of disinflation could be hard-going. So the Fed wants to stay data-dependent and retain maximum flexibility. That means that markets will remain ‘hyper-sensitive’ to inflation news. On the balance of the data, we still expect the first cut in June. And Mr Powell also told us that the pace of QT will slow “fairly soon”. 2️⃣ Second, the Fed shared the updated quarterly forecasts – ‘the dots’. In December, they had 3 cuts pencilled in for 2024 and they’ve retained that guidance. But many investors I speak to already assume 2-3 cuts. Something to ponder there. Just as important is the scenario for 2025. Back in September, the Fed assumed 4 further cuts. But they now guide for 3 rate cuts next year. Of course, there’s a wide range around that. But, if delivered, it would mean that the Fed funds rate only goes back to c 4% by the end of 2025 – by historic yardsticks, it would be a very gradual rate cutting cycle. Meanwhile, the Fed upgraded its growth forecasts (now expecting 2.1% GDP growth in 2024), and lowered the unemployment estimate. In other words, the projected scenario is the softest of soft landings. 3️⃣ Third, the long run. A key issue for investors is where interest rates ultimately settle. The Fed has nudged its assumption higher from 2.5% to 2.6%. But this estimate still looks too low - a legacy assumption from the economy of the 2010s. Today’s macro paradigm is different. A number of Fed officials have already talked about 3% or higher terminal rates. And I would expect the long-run assumption to continue to drift higher. No big surprises, but a few interesting tidbits, and a positive tone for investment markets to respond to. The big week for central bankers continues … #fed #economy #markets #investmentstrategy chart source = HSBC AM, Macrobond

As widely expected, the Fed kept rates unchanged at today’s meeting. The main event, however, was the release of new economic projections from FOMC participations, which sheds light on decisions in future meetings – and indicates the Fed remains vigilant against the threat of a renewed bout of high inflation. Some takeaways: ◾ The FOMC projection for Q4 2025 core PCE inflation rate (YoY) has risen to 3.1%, up from 2.8% previously. Chair Powell also stated tariffs are still “likely to push up prices,” an assessment we agree with. ◾ The FOMC projections for real GDP growth in Q4 2025 (YoY) dropped to 1.4% from 1.7%. But while the Fed assesses growth as slowing, it seems to view this primarily as a negative supply shock (from the tariffs). In principle, while the Fed should respond to a negative demand shock by easing monetary policy, that’s not the case for a negative supply shock. ◾ The median FOMC member continues to expect the federal-funds rate to be cut by 50 basis points in 2025 to a target range of 3.75-4.00%. But expectations for the federal-funds rate at year-end 2026 and 2027 have risen to 3.50-3.75% and 3.25-3.50% respectively, up by 25 basis points compared to the prior projections. ◾ Moreover, despite the unchanged median for 2025, 7 of 19 participants in the FOMC projections now expect no rate cut this year, up from 4 participants as of March. For now, Morningstar continues to expect two rate cuts this year. We expect the uncertainty engendered by the tariffs to constitute a significant negative demand shock, which will call for mild monetary policy easing despite an acceleration in inflation. In terms of the timing, however, it does now look more likely that the first cut will come in September, rather than July as we previously expected.

The Bank of England holds interest rates unchanged as widely expected, though the vote split of 6-3 is more dovish than thought. The Bank of England has a tough call to make and given the various uncertainties, sticking with its guidance of gradual/careful rate cut is understandable. Markets are pricing in over 80% chance of a rate cut in August and another cut in November. The rationale for rate cut is the clear slowdown in the economy, with job losses gathering pace and GDP contracting the most in 18 months most recently. However, inflation is still high with wages rising over 5% and services inflation being stubborn at 4.7%. On top of that, oil prices are climbing again after fresh tensions in the Middle East. If economic weakness intensifies, wage demand is likely to wane, and services inflation could slow. Meanwhile, the higher inflation due to bills and oil prices may prove more temporary. Therefore, we think there is scope for interest rates to go lower, in which the pace depends on incoming data. RBC Brewin Dolphin #BOE #interestrate #MPC #inflation #monetarypolicy