Fed rate decision preview

The Fed delivered 100 basis points of cuts towards the end of 2024, which included a standard rate reduction of 25bps at its final meeting of the year in December.

FOMC members have made it abundantly clear, however, that they see a more gradual pace of easing ahead, with the latest ‘dot plot’ of interest rate projections suggesting that the committee now only expects to lower its fed funds rate on two occasions this year.

In somewhat of a rarity, this is currently bang in line with market pricing for rates, albeit investors see less easing in 2026 than the FOMC outlined in December. We think that recent macroeconomic news out of the US warrants a hawkish stance from the Fed. For starters, the US economy is expanding at a solid pace, with the latest indicators of activity pointing to continued growth of around 3% annualised.

The labour market is also performing well, and jobs are being created at a decent clip - the December Nonfarm Payrolls report smashed estimates, with new employment rising at its fastest pace since March. Progress towards achieving the 2% inflation target remains gradual, and while we did see an easing in monthly core inflation in December, the main measure ticked upwards again.

There is also the small matter of President Trump’s economic policies to contend with. As of yet, we’ve not received any concrete details of his tariff plans, nor would we have expected such news so soon into his second term, although early signs suggest that these policies may be watered down relative to his aggressive campaign proposals.