As the Federal Reserve's January interest rate meeting approaches, traders have almost unanimously expected a "pause in rate cuts," but institutional viewpoints are not unanimous. Macquarie's latest assessment suggests that the next move by the Fed might not be a rate cut. Instead, it could shift towards a rate hike in the fourth quarter of this year, prompting the market to reassess whether the "downward rate channel" has reached its end.
Meeting Timing and Market Pricing: Holding Steady is the Main Theme
According to the Fed's public schedule, the January FOMC meeting is set for January 27-28. In terms of pricing, the market generally expects the Fed to keep rates unchanged in the 3.5% to 3.75% range. CME's "FedWatch" indicates that the probability of a 25 basis point rate cut in January is extremely low, while the likelihood of "staying the same" is overwhelmingly high.
Point of Disagreement: Why Macquarie Bets on "Next Step Might be a Rate Hike"
Contrary to the consensus that "future steps will still mainly involve rate cuts," Macquarie's North American economists believe that the labor market may improve, and unemployment rates may continue to decline, causing the Fed to face the combination of "demand resilience + inflation stickiness" later this year. This team consequently concludes that the Fed's next policy direction is more likely to be an increase in the benchmark rate, with the timing likely falling in the fourth quarter.
Their other logic is that rates may have already returned to levels closer to "normalization/neutrality." Whether the era of long-term ultra-low rates before the pandemic will return, and whether the neutral rate needs to be revised upward, is becoming a new focal point of discussion—if the neutral rate is re-priced higher, then the room for "continuing significant declines" will naturally narrow.
Mainstream Investment Banks Still Prefer Dovish: Two Rate Cuts This Year Remain Main Narrative
Despite Macquarie going "against the wind," many institutions still tend to believe that the Fed may have room for further rate cuts this year. The report mentions that institutions such as Goldman Sachs and Barclays still anticipate two rate cuts this year, but emphasize more on "wait and see" and data dependence in their pace, with the first rate cut likely pushed back to after mid-year.
Survey and Tail Scenarios: Extreme Shift Seen as "Biggest Surprise"
On a broader expectation level, the average judgment of one survey is that the Fed may cut rates two more times (a total of 50 basis points) over the next two years, maintaining rates at a lower range for a longer period. Meanwhile, institutions like Bank of America consider a "sudden rate hike" as a tail scenario, which would be a major surprise if it occurs.
However, Macquarie is not the only institution betting that the "next step might be a rate hike"; the report also mentions that JPMorgan has included the "next rate hike" scenario in its path judgment, although the timing is further back.
