Federal Reserve Rate Cut Speculation

Investing.com — The Federal Reserve is expected to implement a 25 basis point (bp) rate cut in December, according to strategists from Deutsche Bank (ETR:DBKGn). However, they note that the decision remains a “close call,” referring to recent comments from Federal Reserve officials.

While leaning towards a rate cut, the data-dependent nature of the central bank’s approach keeps the option of a pause in consideration.

Federal Reserve Bank of Boston President Susan Collins remarked that a rate cut in December is “certainly on the table” but “not a done deal.” She emphasized the importance of more economic data before finalizing any decision.

Other Fed officials have expressed caution, pointing to inflation surprises or adjustments in the labor market. Core inflation has moderated but is still above target, with the October PCE index reflecting a 2.8% year-on-year increase.

Fed Chair Jerome Powell indicated the bank will “go slower if data permits,” underscoring the necessity for “more certainty to alter policy.” Deutsche Bank noted that most officials' comments lean toward a slightly hawkish stance, indicating the potential for a close call between cutting and skipping in the December meeting.

Powell also observed that while financial conditions have eased and the labor market is cooling, it remains strong. However, uncertainties related to fiscal policies and inflation trends complicate the forecast.

Deutsche strategists estimate that the Fed may strive to maintain rates above 4% well into 2025, reflecting a possibly higher neutral rate of 3.75%-4%. President of the Fed Bank of Chicago, Austan D. Goolsbee, believes rates could drop significantly in the next 12 to 18 months if inflation trends toward 2%.