Fed Watch: Frontloaded easing increases inflation risks – ABN AMRO

Yesterday, Federal Reserve Chair Powell spoke at the National Association for Business Economics annual meeting. He stated that the economic outlook appeared unchanged since the FOMC last met in September. Then, they lowered interest rates by 25 bps due to downside risks to a weakening labour market, even if the weakening is largely being driven by the supply side, ABN AMRO's economist Rogier Quaedvlieg reports.

Fed set to cut in October and December

"The dot plot signalled a median of two more cuts this year, although a sizeable majority saw no further cuts this year. Due to the upcoming blackout period, this was Powell’s last chance to push back against markets, who have fully priced in these two rate cuts. He refrained from doing so, suggesting he expects to find consensus in the upcoming meeting, and leading us to formally update our base case. We now expect the Fed to cut in both the October and December meeting, and another 75 bps next year, at a quarterly 25 bps pace, reaching a terminal upper bound of the Fed funds rate at 3.00% by September 2026."

"We think policy is currently not as restrictive as the FOMC appears to think, and we think the upside risks to inflation outweigh the downside risks to the labour market. This frontloaded easing path increases the probability of the upside inflation risks materializing. Two important forward looking arguments are that the US AI-boom, despite being largely interest-rate insensitive until now, is becoming increasingly debt financed and may be further spurred by lower rates."

"A second is that monetary easing is happening at the same time as various forms of fiscal easing expected in the next year. Recent increases in inflation were largely demand-driven and may well accelerate further because of monetary and fiscal easing. Tariff-induced inflation will add additional pressure in the coming year. This also means that we see the risks to our Fed path as predominantly to the upside. We’ll provide updated inflation and growth forecasts in the upcoming Global Outlook."