QNB expects the US Federal Reserve to continue its “accommodative” stance, likely cutting interest rates by a total of 75 basis points this year, before continuing to implement further cuts in 2025.
In its weekly report, QNB attributed the Federal Reserve’s move to adopt and implement a dovish stance to the fact that conditions are now ripe for the Federal Reserve to begin a major monetary easing cycle.
The bank noted in its report that every summer, the US Federal Reserve hosts a major economic policy symposium in Jackson Hole, Wyoming. This meeting is one of the world’s most prestigious central banking conferences, attracting leading economists, bankers, market participants, academics and policymakers to discuss long-term macroeconomic challenges.
He added, “While the Jackson Hole Symposium has always been a high point on the agenda for investors and policymakers, this year’s symposium has taken on special significance. For the first time in half a decade, it was held amid discussions about starting a major monetary easing cycle. This comes on the heels of one of the largest monetary tightenings in decades.”
He pointed out that the symposium was held at a time of widespread speculation about the size and pace of the Federal Reserve’s monetary easing measures. After months of caution and keeping interest rates higher for longer on the back of inflation that remains above the target rate, investors were waiting for statements from Fed officials at the upcoming meetings of the Federal Open Market Committee. The prevailing view was that inflation in the United States is expected to gradually return to the target rate.
He noted that throughout the symposium, the general tone of Fed officials was unequivocally “dovish,” that is, biased toward a more aggressive rate-cutting cycle, and according to Fed Chairman Jerome Powell, “the likelihood of higher inflation has diminished and the likelihood of weaker employment has increased.” Moreover, Powell stressed that the direction of interest rates is clear, as the priority of monetary authorities is rapidly shifting from containing inflation to preventing further “erosion and difficulties in the labor market.”
“In our view, the Fed will continue to adopt a dovish stance, cutting interest rates by a total of 75 basis points this year, before continuing to implement further cuts in 2025,” QNB explained in its report. “In fact, we expect the federal funds rate to reach a high of 3 percent in late 2025, before reaching its cycle low of 2.5 percent in 2026. Two key factors support its forecast.”
The report stated that the first factor is that overall inflation in the consumer price index remains about 90 basis points above the target rate of 2 percent, and forward-looking indicators point to strong deflationary trends going forward, adding that if we exclude house price inflation, which tracks housing costs and rents as the largest component of the consumer price index, the inflation rate will be below the target level of 2 percent. This indicates that inflation has been successfully controlled and that it is time for the Federal Reserve to adjust interest rates and monetary policy.
The second factor cited by the report is that the labor market has already adjusted significantly, with the unemployment rate rising from 3.4 percent to 4.3 percent since January 2023, reaching the upper limit of what the Federal Reserve considers “full employment,” which is sufficient to contain wage pressures to a level in line with the 2 percent inflation target. However, there is a risk that negative trends in the labor market will gain further momentum, leading to inappropriate levels of unemployment and deflationary pressures.
In the same context, the report indicated that, with both inflation and real GDP growth slowing rapidly in the United States, the efficiency of monetary policy is diminishing, increasing the burden of high interest rates on households and businesses. Therefore, in order for the Fed not to fall too far behind, i.e. continue to use inappropriate interest rates, it must act decisively. Expectations indicate that the neutral rate is 3 percent. Therefore, in order to prevent a sharper slowdown and achieve the expected “soft landing,” the Fed will likely have to ease monetary policy with interest rates below 3 percent.
Based on these factors, the report generally sees conditions as ripe for the Fed to embark on a major monetary easing cycle, with inflation effectively at target, “full employment” at risk, and overall macro conditions consistent with a series of rate cuts.
