RHB Bank Singapore’s acting group chief economist and head of market research Barnabas Gan is keeping to his forecast of three US Federal Funds Rate (FFR) cuts in 2025 — one per quarter starting 2Q2025.
The US Federal Reserve voted unanimously earlier this week to keep the FFR in a range of 4.25% to 4.5%. The Fed had lowered rates by a full percentage point in the final four months of 2024.
In a Jan 31 note, Gan lists three factors that inform his view, which is above the previous market consensus of one or two cuts this year.
First, there is increased uncertainty over how inflation may trend, says Gan. The Federal Open Market Committee (FOMC) removed a comment that inflation has “made progress toward… 2% objective”, he adds, with the sentence merely reading “inflation remains somewhat elevated”.
Second, the official economic outlook has improved since December 2024, with the statement citing labour conditions “remain solid” and the unemployment rate has “stabilised at a low level”, notes Gan.
Third, the bias is still for more rate cuts as the current FFR remains too high, says Gan. Fed chair Jerome Powell commented that the current FFR level at “4.3%… is above the committee’s estimate of a longer-run [term] neutral [rate]”.
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“We recognise a higher sense of uncertainty on how US inflation could evolve; we continue to show statistical evidence for inflation to trend lower into the coming year, but US tariff-related policies inject a fair amount of noise into the outlook,” he adds. “Given the information, we keep to our outlook for one FFR cut [of] 25 basis points (bps) per quarter in 2025, with the first cut to materialise in 2Q2025.”
Europe’s decision
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The European Central Bank’s (ECB) decision to cut rates yesterday was “well-expected”, says Gan, but more rate cuts will be seen.
Gan forecasts three more ECB rate cuts in 2025, with officials reducing 25bps on its deposit facility (2.75%), main refinancing (2.90%) and marginal lending facility rates (3.15%). “At the very least, there will likely be another 25bps rate reduction in its March meeting, with officials possibly dropping its definition for rates as ‘restrictive’ then.”
Gan says his team’s reading of Europe’s economy “remains neutral at best”. “We think economic growth may stay soft in 2025, with manufacturing activities to contract further against a fragile consumer and household confidence backdrop.”
ECB officials have, in the past, commented that neutral rates are between 1.75% and 2.50%, notes Gan, thus giving market-watchers “some clarity” on how much rates could fall in the year ahead.
Trump’s tariff threats
Gan sees “potential renewed strength” in the US dollar and higher US 10-year yields to move towards 4.6% in the coming week.
He remains observant of the potential intensification of US tariff threats as US President Donald Trump will reportedly impose the first wave of tariffs tomorrow on Canada and Mexico. This could mean 25% tariffs on about US$900 billion ($1.22 trillion) of goods from both nations.
Earlier this week, Trump indicated he would move forward with 10% import duties on China but did not specify a timing, Gan notes. “The uncertainties surrounding trade tariffs, which may intensify supply chain challenges, could deepen inflation fears.”
With the Fed and ECB diverging, widening US-EU rates may also exacerbate US dollar strength in the week ahead, says Gan. “However, US dollar and US Treasury yields may peak due to increased market expectations for FFR cuts in 2025, with the current swap pricing already adjusting higher to two rate cuts as of this morning from one to two cuts at last week’s reading.”
