“The weakening US labour market, alongside the likely erosion of disposable income due to tariffs, should lead the Fed to cut rates further this year, even if inflation may accelerate somewhat.”
- The Committee was relatively unanimous in its decision, with only governor Miran preferring a 50bp cut.
- Chair Powell suggested that the latest cut was driven by risks on employment and that it was a “risk-management cut”.
- Leading indicators of wage growth and employment point to potential further softening ahead for private consumption.
At its September meeting, the Fed cut the Fed Funds target range by 25bp to 4.00-4.25%, as expected. The Fed’s economic projections showed the median Fed Funds forecast shifting to a total of 75bp of cuts this year, implying a 25bp cut at each of the remaining two meetings. This is happening at a time when both the ECB and BoE left rates unchanged, thus providing opportunities for global fixed income investors to play central banks’ policy asynchrony.
We expect the US economy to slow in late 2025 and early 2026, due to the cooling labour market combined with the impact of tariffs on disposable income. On the price front, US importers have been absorbing most of the higher costs implied by tariffs, containing the impact on consumer inflation for now. However, inflation might accelerate over the next few months, eroding the consumers’ spending power. This scenario – combined with political pressure on the Fed - supports our view of two further rate cuts this year.
You can now read the full whitepaper at the link below
