BNY’s house view for 2025 has changed from 100bps to just two 25bps cuts, “both relatively early in the year — say, March and June”.

John Velis, BNY’s Americas macro strategist, expects the US Federal Open Market Committee (FOMC) to lower the Federal Funds Rate by 25 basis points (bps) on Dec 18 (Dec 19 Singapore time).

In addition, this is likely to be the “last cut for while — if not for good”, says Velis in a Dec 17 note, as the inflation and economic policy outlook are both “murky” going into 2025.

Velis expects US Federal Reserve chair Jerome Powell to sound a “very cautious note” alongside the announcement. Given the uncertainties ahead, the Summary of Economic Projections (SEP) due alongside the rate announcement will likely reflect “wide differences of opinion” on the FOMC, says Velis.

“Nevertheless, we do expect them to indicate a much slower pace of easing in 2025 than we saw in the last set of dots, back in September, when the Fed kicked off the easing cycle with a 50bps cut,” he adds.

At that time, the median dot for the end of 2025 indicated 100bps of rate cuts then. Velis thinks that will fall to 50bps “or even less” with the December release of the SEP.

Reversal of expectations

Market expectations for 2025 have made a “steady and notable reversal” since that Sept 18 FOMC meeting, where the Fed eased monetary policy for the first time in four years.

The current inflation picture is “less encouraging” than it was back in late summer this year, notes Velis. Recent Consumer Price Index (CPI) and Personal Consumption Expenditures Price Index (PCE) prints have indicated steady inflation, with little improvement in the main drivers of core inflation.

Major components of core CPI have been rising in recent months, showing that inflation progress is stalling. Shelter inflation remains stubborn, and core services ex shelter have begun to pick up again. Even core goods inflation has started to rise after months of disinflation or even mild deflation. 

Nevertheless, the implications from the most recent CPI and Producer Price Index (PPI) prints indicate a better picture for the November PCE inflation figure, due to be released well after the FOMC, likely allowing the Fed to execute this final cut of the year, says Velis. 

While BNY had agreed with the September dots indicating 100bps of cuts in 2025, Velis says the house view has changed to just two 25bps cuts, “both relatively early in the year — say, March and June”. 

“This reflects both the stalled inflation picture as well as the implementation of policies that are likely to be inflationary,” he adds.

Chart: BNY Markets