Last week the US Federal Reserve surprised economists by cutting interest rates by 50 basis points, instead of the widely expected 25. The Fed, with this move, has initiated its first rate-cutting cycle in four years, last observed when the central bank was forced to cut rates to zero amidst the onset of the COVID-19 pandemic. As detailed by Fed Chair, Jerome Powell, the reason behind this surprising move was a need to compensate for the Fed’s decision to keep rates on hold at their previous meeting, when weak labour market data was yet to be released and the indication was to anticipate smaller-sized rate cuts over the coming months.
The profile of this rate-cutting cycle is also exceptionally uncertain: while it is true that some of the tailwind that has been supporting the economy has disappeared — notably the depletion of excess pandemic savings — the economy continues to grow at a solid rate. Some market participants are worried that the current weakness in the labour market may trigger a recession for the US economy, and therefore expect the Fed to deliver faster rate cuts. At Fathom, we forecast a shallower rate-cutting cycle, with the policy rate settling at around 100 basis points higher than market pricing through 2026. Fathom’s reason being that we expect the economy to remain resilient regardless of who wins the US presidential election, with strong demand resulting in price pressures that soften only gradually. However, we remain vigilant as there are several risks on the horizon that could distort this outlook — such as a rise in corporate defaults, a global trade war and conflict escalation in the Middle East. Stripping out the economic cycle, we acknowledge that there is a large degree of uncertainty regarding where interest rates might eventually settle, and we will continue to look for further evidence on that front.
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The views expressed in this article are the views of the author, not necessarily those of LSEG.
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