What to expect from the Fed in its first meeting of 2025
Updated:
28 JAN, 2025
By Jose Luis Palmer from RankiaPro Europe
This Tuesday and Wednesday the first Fed meeting of the year will take place and also the first under the Trump administration. International fund managers are unclear whether the Federal Open Market Committee (FOMC) will choose to cut interest rates at its meeting this week, or wait to do so at its March meeting, so uncertainty remains on the table.
Here is the fund managers' outlook for the Fed's January meeting.
Attention will be on Powell's reaction to Trump's policies
Erik Weisman, chief economist, MFS IM.
The Fed meets these days, with the widespread expectation that the official interest rate will remain unchanged. However, the market will have many questions. But we probably won't get too many answers. Without new "points" or new macroeconomic forecast figures to analyze, attention will be on President Powell's press conference. In view of this meeting, the market estimates approximately a 25% probability of a cut by the Fed in March and does not fully anticipate a cut until June. Will the press conference offer us something that alters these expectations?
In addition to the Fed's usual assessment of recent economic growth and inflation dynamics, markets will be particularly attentive to Powell's views on President Trump's actions and policy proposals to date. However, Powell is likely to adopt a cautious stance, avoiding issuing strong judgments before Trump's policy is fully implemented and opting to buy time for a more grounded analysis. In this sense, although the tariff measures taken during the first week have been less disruptive than anticipated, the magnitude and scope of future actions remain shrouded in great uncertainty.
On the other hand, Trump's initial measures on immigration and deportation have been considerably more forceful and impactful. There are already anecdotal indications that these policies could negatively affect, almost immediately, the labor force participation rate, with possible implications for wage and consumer inflation rates. However, without official data to support this hypothesis, Powell is likely to adopt a wait-and-see stance before issuing definitive judgments.
On the other hand, the market is also expectant about the Federal Reserve's plans to end the quantitative tightening (QT) process. Although the Fed is relatively confident, given that bank reserves remain abundant and the risk of repeating the mistakes of the previous QT cycle is low, the situation is not without complexity. The debt ceiling, which limits the General Account of the Treasury and the reverse repurchase facility, could significantly cloud the economic signals that the Fed intends to monitor. In this context, the market would welcome a swift conclusion of the QT, as this would reduce the chances of errors by the Fed.
Fed on hold and ECB to cut
Vis Nayar, Chief Investment Officer & Ray Farris, Chief Economist; eastspring investments
The Fed is likely to keep rates unchanged this week while the ECB should cut by 25bps. With markets now priced for 44bps of Fed cuts and 87bps for ECB, the focus will be on guidance.
We expect Fed Chair Powell to stress that the strength of the US economy allows the Fed to remain on hold and data dependent. Powell will also reiterate Fed independence in response to likely press questions about President Trump’s recent assertion that the Fed should cut aggressively.
Incoming data on inflation and unemployment will be crucial for the Fed. Powell has leaned dovish in the past 6–9 months, shifting rhetoric quickly toward cuts in response to weak payroll and rises in the unemployment rate, but has refused to entertain the possibility of a return to hikes when the data have been more robust.
This suggests that a scenario in which CPI prints in January and February are soft, combined with higher unemployment rates, would open May for a rate cut.
Inflation data do not rule out future cuts
Christian Scherrmann, economist for the USA, DWS.
We expect the Federal Reserve to maintain its stance at the upcoming January meeting of the Federal Open Market Committee, but current data could suggest a less aggressive stance than in December. Recent inflation data leave the door open to further rate cuts, albeit limited, and labor markets - despite robust hiring - are currently not a source of inflationary pressures. What remains, however, is political uncertainty. Although central bankers now have some input from the new Administration, it is still unclear how tariffs will be used, let alone how fiscal policy will be shaped. In addition, growth and disinflation in 2023 and 2024 were supported by a large influx of working-age people, but initial estimates suggest that this will significantly decrease in the future. The economic consequences are difficult to assess and it remains uncertain whether possible disinflationary trends, resulting from slower growth, can offset possible price pressures arising from tightening labor markets, due to a reduction in labor supply.
Regarding tariffs, the question remains whether they are really an economic policy tool or if the Administration intends to use them to finance spending. We expect a hybrid outcome in which they first serve as a foreign policy tool and, later, as trade agreements are finalized, they may contribute to some extent to public revenue. This implies a narrative of fewer tariffs and a more gradual introduction, which could support expectations of a less significant impact on inflation. There seems to be a contradictory debate among central bankers on this issue. A slight and punctual increase in tariffs could disappear from inflation calculations after a year, but broad and significant tariffs could support domestic demand for certain goods, to the point of making a price and wage spiral possible. Although central banks are likely to ignore temporary price increases resulting from tariffs, they will have to respond to more permanent price pressures emanating from labor markets.
In conclusion, given the still incomplete information from the Administration, we maintain our expectation of a Fed that will likely lower rates a bit more in March and perhaps in June, before waiting to see what happens, given that inflation continues to resist. Needless to say, for the moment, risks are tilted to the upside.
The Fed will no longer play a leading role
Capital Group.
The Federal Reserve has largely achieved its goal. Inflation is decreasing and labor markets are solid. The next step is to adjust the level of interest rates to keep the economy in balance. "The Federal Reserve will no longer play a leading role," says manager Pramod Atluri.
Markets will now focus their attention on economic growth, corporate profits, and the evolution of the political and regulatory context. Trump's economic policy priorities in this second term, which include tax cuts, tariffs, and deregulation, could favor the growth of the US economy and risk assets. They could also cause a strengthening of the dollar, an increase in inflation, and high interest rates.
The impact of fiscal policies makes the prospects of the Federal Reserve more confusing, especially in a context of economic solidity. "Interest rates do not seem very restrictive for economic growth," explains Atluri.
"In the absence of a recession, the Federal Reserve could make fewer cuts than expected before the elections". In addition, Atluri is not convinced that tariffs will be as forceful as to slow growth and increase inflation. Despite the tariffs, inflation did not accelerate during Trump's first presidency. "It ended up being a solid growth environment with contained inflation". That said, we could see an increase in volatility in interest rates and financial markets as investors calibrate the direction of future policies.
Inflation will be sticky
Russel Matthews, senior portfolio manager, RBC BlueBay Asset Management.
We think that money market forward curves pricing expectations for the Federal Reserve and the ECB are close to fair value at this moment.
In the US, inflation will be sticky, especially if Trump tariff agenda is aggressive and we see material increases in tariffs on Europe and China. The US economy is carrying good momentum into 2025 and the Trump economic agenda has improved sentiment in the US. There is more risk of growth upside than downside. The market pricing of 1 to 2 cuts for 2025 is fair.
At this moment, we are fairly neutral on the outlook for core rates in the US and Europe. At the margin, we favour German bunds over US Treasuries, but conviction is fairly low. We have a more convicted view that yields in Japan have further to rise. We expect 10yr JGBs to continue rising towards 1.50%. In the near term, the technical in corporate bonds remains strong, with demand for new issues high. However, much will depend on the Trump economic agenda and there is a wide range of outcomes here, so we are relatively neutral on corporate credit at this juncture.
