|

What’s the outlook for the Federal Reserve’s interest-rate policy?

Scope Ratings (Scope) expects the Federal Reserve to deliver a second consecutive 25bp “risk management” cut on Wednesday in response to the softer US jobs market and a slight easing in September core CPI. Futures markets are nearly fully pricing 25bps for this week and recent remarks by Federal Reserve Chairman Jerome Powell point in this broad direction.

Market attention will focus on the press conference and the signals of next steps. A further 25bp cut by December may be the going assumption but this is not pre-determined. Any rise in inflation and/or signs the softening in the labour market is proving temporary may embolden views among some governors for a pause after this week. Nevertheless, with the Fed’s “doves” in the driver’s seat, an early end to quantitative tightening looks likely.

The Fed remains divided

The Fed remains divided not least because of heightened political pressure and growing calls to change the inflation objective, which would facilitate the deep interest-rate cuts that the White House is seeking. Some Federal Open Market Committee members are voting as if the inflation target were already 3% rather than 2%, while others stress that inflation has stayed above a long-held 2% official goal for more than four years, so premature rate cuts could further de-anchor inflation expectations.

More increases in US trade tariffs and broader price pressures emphasise the need for caution. Persistent political interference could undermine the independence of the Fed and credibility regarding price stability, thereby eroding the confidence of capital markets.

The US economy has been growing resiliently, raising some questions around how long the softer labour-market data will last. The lack of official data during the current government shutdown also complicates decision making, encouraging policymakers to maintain the course they laid out during September in the absence of much further information.

US inflation remains well above the official target

US headline consumer price index, % year on year.

Dashed lines on the graphic in 2025 and 2026 designate Scope estimates for calendar-year average inflation in 2025 and 2026. Source: US Bureau of Labor Statistics, Scope Ratings forecasts.

Author

Dennis Shen

Dennis Shen

Scope Ratings

Dennis Shen is Chair of the Macroeconomic Council and Lead Global Economist of Scope Ratings, the European rating agency, based in Berlin, Germany.

More from Dennis Shen
Share:

Editor's Picks

AUD/USD hangs near three-week low, below 0.6950 as traders await US NFP report

AUD/USD hits a three-week low during the Asian session on Friday as the RBA’s dovish shift and a rout in equity markets weigh on the risk-sensitive Aussie. However, the recent slump in US bond yields to a two-month low keeps US Dollar bulls on the back foot and limits losses for the currency pair as traders look to the US NFP report for a fresh impetus.

USD/JPY bounces off three-week low; keeps the red near 157.65 as focus remains on US NFP

USD/JPY bounces off the weekly low set during the Asian session, as bears turn cautious ahead of the US NFP report due later this Friday. The upside seems limited as the recent slump in US bond yields and hopes of Iran war de-escalation undermine the US Dollar. Moreover, a hawkish BoJ and intervention risks support the Japanese Yen, capping the pair.

Gold loses the grip; $4,000 comes next on the downside

Gold sets aside two daily advances in a row on Friday, opening the door to a potential test of the key $4,000 mark per troy ounce. The precious metal’s retracement follows a decent improvement in the sentiment surrounding the US Dollar, solid NFP data and higher US Treasury yields across the board.

Democrats win House and Senate in US midterms: Why isn’t all bad news for crypto

The biggest story this week was Tuesday’s US midterm elections, which saw Democrats win control of both the House and the Senate in a clear blue wave. This political shift in the US has triggered sharp price swings across the cryptocurrency market.

Week ahead – Inflation and geopolitics in focus as US political landscape shifts

Post-midterm election euphoria fizzles out as risk aversion prevails. US CPI, PPI and Fedspeak on the radar as Fed hike bets remain supported. Oil retreat pauses on mixed hopes about the ongoing conflicts.

US Dollar breaks below 101.50 as Democrats sweep Congress
The US Dollar (USD) comes under heavy selling pressure on Wednesday, with the US Dollar Index (DXY) falling around 0.5% to trade near 101.35 after sliding below the 101.50 level. The Greenback retreats to its lowest level in four weeks as investors reassess the political and economic outlook following the Democratic Party's sweeping victory in the United States (US) midterm elections.