Staying on rate cut path with 25-bps move and political defiance – UOB Group

The Fed in its 6/7 Nov 2024 Federal Open Market Committee (FOMC) meeting, unanimously decided to reduce the target range of its Fed Funds Target Rate (FFTR) by 25-bps to 4.50-4.75%, in line with our and broad market expectations. The Fed also voted to cut the interest rate paid on reserves (IOER) balances by 25-bps to 4.65% while keeping the pace of QT unchanged, UOB Group’s economist Alvin Liew notes.

Fed provides scant forward guidance

“The most notable changes in the Nov monetary policy statement (MPS) were the removal of the entire statement, ‘has gained greater confidence that inflation is moving sustainably toward 2 percent,’ and replacing ‘In light of the progress of inflation and the balance of risks’ simply with ‘In support of its goals’. During the press conference, FOMC Chair Powell explained that both modifications were ‘not meant to send a further signal’ and that ‘further confidence’ was a test for the first rate cut, and that test has been met.”

Powell deflected most of the political questions except saying election outcomes will not impact policy decisions in the near term, and more importantly, a point-blank ‘no’ that he would not resign if the President-elect Trump asked him to leave, adding that it is ‘not permitted under the law’ for the US President to remove the Fed chair and Vice chairs. This left no doubt that Powell intends to complete his term which runs till May 2026.

“While we too agree that the US election results will not impede on the Fed’s gradualism in the pace of easing trajectory for the rest of 2024, there could be serious questions being asked about the independence of the Fed once Trump assumes office in 2025. For now, we still expect one more 25-bps cut for the Dec 24 FOMC to bring rates to 4.25%-4.50% by end-2024, followed by 100 bps of cuts in 2025 (one 25-bps cuts per quarter) with one final 25-bps rate cut to bring us to the terminal rate of 3.25% by 1Q 2026.