Ahead of tomorrow’s all important Fed FOMC meeting, Anthony Willis, Senior Economist at Columbia Threadneedle Investments, has shared his thoughts on what reaction we might see from across the pond given the expectations of a cut in interest rates.
As Willis comments: “All this sets the tone for a very interesting Federal Reserve meeting this week – markets are pricing in a 100% probability of a 25-basis point rate cut, but the associated communications may be interesting given that we have already seen splits in Fed voting. There are expectations that some members may vote for larger rate cuts. The data around inflation is settling around 3% – above target, but we haven’t yet seen a huge amount of inflation pass through from tariffs. There are, however, signs that inflation is trending higher in core goods, which is where the tariffs will likely show up. Although core goods is a relatively small part of the inflation basket (around 19%), the direction of travel in the underlying data is higher.
“With a 25-basis point cut all but guaranteed, markets are pricing in a total of 140 basis points of reductions over the next 12 months. That seems optimistic – normally we get that level of cuts during a recession. Is the US going into recession? Certainly, the data currently doesn’t suggest that, so maybe markets need to be careful what they wish for. That said, the Fed leadership and the make-up of the board will be changing. We are likely to have a new Fed chair announced before Christmas and the wider board is also set for change with a more dovish – and President Trump-friendly – view on rates.”
