Fed likely to cut rates next week, but outlook to tilt hawkish: Macquarie

Investing.com — The Federal Reserve is likely to cut rates next week, but a slew of data pointing to a still strong labor market and slowing disinflation will force the Fed’s outlook on interest rates to tilt more hawkish, analysts at Macquarie said in a Monday note.

“[W]hile the Fed will cut next week, the Fed’s consensus (median) will be to tilt the outlook in a more hawkish direction than in September or November,” Macquarie analysts noted.

A 25bps rate cut  for Dec. 18 is nearly priced it at 90.1%, according to Investing.com’s Fed Rate Monitor Tool. 

The recent slowdown in the pace of U.S. disinflation, a lower unemployment rate than anticipated in September, and exuberance in US financial markets are contributing to this more hawkish stance, they added.

The unemployment rate remains low,  and lower than the 4.4% projection for Q4 in the Fed’s September Summary of Economic Projections, 

Wage disinflation, meanwhile, has slowed in recent months, becoming “sticky,” the analysts said, similar to core PCE inflation and other measures of the common component of inflation.

Against the backdrop of slowing disinflation, U.S. equity multiples have also risen to rarely seen levels, while credit risk spreads are at their tightest levels of the post-pandemic period.

The analysts also highlight another factor that could make the Fed more cautious: the drawdown of the Treasury’s General Account at the Fed once the debt ceiling becomes binding on Jan. 1, 2025.

This could be “stimulative for the inflation and the stock market,” the analysts said, forecasting “upwards of USD 400bn may be released as new liquidity.”

“[T]he Fed may not wish to augment this by signaling that policy rates will go much lower in Q1 2025,” the analysts added.