Following the US Federal Reserve (Fed)’s lowering of the benchmark interest rate for a third consecutive time on Wednesday, market watchers and analysts from various research houses say the cut was a “hawkish” one.
The move reduces the central bank’s Federal Funds Rate by 25 basis points (bps) to between 4.25% and 4.5%. “The dot plot and economic projections were hawkish. This suggests the US Fed is acknowledging last-mile inflation risks and potential upside pressure from the policies of an incoming Trump administration,” says Nomura’s Global Markets Research analysts.
Jack McIntyre, portfolio manager at Brandywine Global, says that the actual cut of 25bps was the “least important component of the meeting” as it was already priced in by markets. He says that including the forward guidance components, the cut was a “hawkish cut”.
JP Morgan’s Asia-Pacific chief market strategist Tai Hui notes that the Summary of Economic Projections (SEP) updates hints at a no-landing scenario rather than a soft landing, with the US real gross domestic product (GDP) growth projections upgraded to 2.5% this year and reaching 2% by late 2026.
“To us, this suggests that we’ve entered a new phase of the rate cutting cycle,” says Rick Rieder, BlackRock’s chief investment officer of global fixed income and head of the global allocation investment team.
He adds that the Fed’s mantra becomes one of even greater data dependency, and one that perhaps incorporates more than merely the traditional employment and inflation data. “We are entering a very different period of policy-influence, and consequently growth and inflation reaction,” Rieder notes.
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As such, the Fed may sit back over the coming months to witness, understand and assimilate into their models of where the economy — and their specific mandated objectives — are likely to lie, the BlackRock CIO says.
The Fed may therefore call out “dots all folks” in terms of near-term cuts, but with eyes wide open as to where conditions could evolve in the year ahead, Rieder adds.
Where interest rates are going to be in 2025
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The Federal Open Market Committee (FOMC) aligns with market expectations of two 25bps rate cuts next year, even though policy adjustments remain uncertain, says Tai from JP Morgan.
BlackRock says the dot plot today showed a significantly hawkish lowering of the rate cuts to two over this coming year, from four anticipated as recently as September, and with a nudging up of the terminal interest rate to 3% from 2.875%.
However, they argue that the dot plot is less relevant today than it was a few months ago, and from an investment perspective, they hold that interest rates are not going to be the road to return success from here.
“We like holding the shorter end of the yield curve, in order to clip attractive yield/carry and wait (like the Fed) for more information to come in,” says Rieder.
Likewise, Jean Boivin, head of BlackRock Investment Institute (BII) says markets now expect a pause in January and just two cuts in the whole of next year, down from almost six in early September.
“This is another meaningful shift in the US Fed’s framing that just three months ago prompted a 50bps cut. But this shift is in line with what we have been flagging: persistent inflation pressures would prevent the Fed from carrying out the easing cycle markets were hoping for,” says Boivin.
Instead, BII expects the US Fed to recalibrate policy — merely taking it from restrictive to less restrictive. This is exactly what is coming to light, with Fed chair Jerome Powell implying that the central bank may put an end to its consecutive cuts by pausing as soon as its next meeting in January. “We are at or near a point at which it will be appropriate to slow the pace of further adjustments,” says Fed chair Jerome Powell.
Given the risk of resurging inflation from potential trade tariffs and a slowdown in immigration that has been cooling pressure in the labor market, market expectations of only two more cuts in 2025 now seem reasonable, says BII.
