Fed's December Rate Cut Set, but January's Path Remains Uncertain – What’s Ahead for Markets?

 

Hey everyone, let’s dive into the big Fed news this week. So, it looks like a December rate cut is almost a done deal, but when it comes to January, things are still pretty up in the air.

 

Why the uncertainty? Well, Fed Governor Goolsbee, who’s generally on the dovish side, recently hinted that the pace of rate cuts might slow down in 2025. This has left the market with mixed feelings, especially after the latest inflation reports. Housing inflation, in particular, has been cooling off, and that’s given some hope that the Fed might follow through with consecutive cuts in both December and January. But Morgan Stanley believes that Goolsbee's comments, made before the inflation data came out, might not fully reflect the current economic reality. In fact, they think that the decline in housing inflation could actually spur the Fed to act more aggressively in the next two meetings.

 

However, market expectations for a rate cut in January are still relatively low, with only about an 18% chance priced in. Morgan Stanley thinks this might be underestimating the likelihood of a cut, especially with housing inflation continuing its downward trend. They believe the Fed could actually take a more aggressive stance in early 2025, which could lead to a rate cut in January.

 

 

On top of that, there's a lot of focus on the upcoming Fed dot plot, which is a key tool investors use to gauge where the Fed is headed with its policy. According to Morgan Stanley economists, the latest report suggests that the median rate expectation for 2025 might stay around 3.375%, which is lower than what the market is expecting. If this happens, it could signal a more accommodative stance from the Fed in the near term.

 

And then there’s Powell’s press conference. Investors are expecting him to temper expectations, implying that rate cuts won’t come as fast in 2025. But Morgan Stanley warns that markets have a tendency to over-interpret Powell’s cautious language. While he may stick to his usual “data-dependent” mantra, the market could misread this as a signal that the Fed won’t act as quickly as expected, especially after those solid inflation reports we’ve seen.

 

So, the keyword here is inflation, particularly housing inflation, which is still the driving force. If housing inflation continues to slow, as expected, the Fed could gain more confidence in continuing the rate cuts. This could open the door for more action in both December and January.

 

What’s your take on the Fed’s rate cuts in the next two months? #fedrate #ratecut