The US financial markets faced pressure earlier this year amid fears of continued Federal Reserve monetary tightening, fueled by growing concerns about inflation during the first quarter.
However, as price pressures eased and manufacturing and jobs data weakened, recession fears mounted. The Fed concluded its tightening cycle in September after cutting interest rates by 50 basis points (bps).
As the Federal Open Market Committee’s (FOMC) final meeting of the year approaches, markets 99% believe policymakers will cut interest rates for the third consecutive time. But what if the central bank surprises markets regarding borrowing costs?
US monetary policy: From tightening to easing
From March 2022 to July 2023, the Federal Reserve raised interest rates 11 times, pushing them close to 0%. The rates remained between 5.25% and 5.50% from July 2023 to September 2024.
The September Fed meeting’s minutes showed that one member favored a 25 bps cut to the target borrowing range, marking the first division of opinion since 2005.
In November, policymakers lowered interest rates by 25 bps, and investors are awaiting a third cut in Wednesday’s meeting.
Could the Fed surprise the markets?
Comments from the FOMC members since November suggest a reduced urgency to ease policy, as downside risks to economic activity and employment have faded amid slowing inflation.
While Fed policymakers remain confident that inflation is on track to reach the 2% target sustainably, senior FOMC members see a potential “pause” in policy adjustments.
Since the September meeting, futures markets have predicted a 100 bps rate cut by the end of 2025, bringing rates to 3.85%—50 bps higher than the Fed’s forecasts. This compares to earlier expectations of 2.85%, 50 bps lower than the Fed’s outlook.
The US economy added 227,000 jobs in November, surpassing expectations of 214,000, while average hourly earnings rose by 0.4%, bringing the annual rate to 4%, also above forecasts.
The US financial markets faced pressure earlier this year amid fears of continued Federal Reserve monetary tightening, fueled by growing concerns about inflation during the first quarter.
However, as price pressures eased and manufacturing and jobs data weakened, recession fears mounted. The Fed concluded its tightening cycle in September after cutting interest rates by 50 basis points (bps).
As the Federal Open Market Committee’s (FOMC) final meeting of the year approaches, markets 99% believe policymakers will cut interest rates for the third consecutive time. But what if the central bank surprises markets regarding borrowing costs?
US monetary policy: From tightening to easing
From March 2022 to July 2023, the Federal Reserve raised interest rates 11 times, pushing them close to 0%. The rates remained between 5.25% and 5.50% from July 2023 to September 2024.
The September Fed meeting’s minutes showed that one member favored a 25 bps cut to the target borrowing range, marking the first division of opinion since 2005.
In November, policymakers lowered interest rates by 25 bps, and investors are awaiting a third cut in Wednesday’s meeting.
Could the Fed surprise the markets?
Comments from the FOMC members since November suggest a reduced urgency to ease policy, as downside risks to economic activity and employment have faded amid slowing inflation.
While Fed policymakers remain confident that inflation is on track to reach the 2% target sustainably, senior FOMC members see a potential “pause” in policy adjustments.
Since the September meeting, futures markets have predicted a 100 bps rate cut by the end of 2025, bringing rates to 3.85%—50 bps higher than the Fed’s forecasts. This compares to earlier expectations of 2.85%, 50 bps lower than the Fed’s outlook.
The US economy added 227,000 jobs in November, surpassing expectations of 214,000, while average hourly earnings rose by 0.4%, bringing the annual rate to 4%, also above forecasts.
