December Rate Cuts Seem Certain, Market Focuses on 2025 Policy Pace
As the Federal Reserve's December meeting approaches, the market widely expects a rate cut this month. However, Morgan Stanley economists point out that the pace of rate cuts in 2025 may face greater uncertainty, especially after recent comments by Chicago Fed President Goolsbee, which have made market expectations for 2025 rate cuts more cautious.
According to a report released by Morgan Stanley on December 14th, the median rate in the Federal Reserve's December dot plot is expected to remain around 3.375%, lower than the previous market expectation of a 3.4% to 3.7% range. The report suggests that this change may signal a more accommodative monetary policy. Nonetheless, Fed Chair Powell's statements will be key to the policy direction.
Goolsbee's Comments Prompt Re-evaluation of Rate Cut Pace
Goolsbee, once seen as a "super dove" within the Federal Reserve, drew market attention with his remarks at the Chicago Fed Economic Outlook Symposium earlier in December. He mentioned that the Fed could face a series of "tough choices," and interest rates would need to drop significantly. However, he also hinted that next year's rate cut pace might slow. This statement has made the market more cautious about future rate cut possibilities.
The market reaction is complex. Although data indicates a continued decline in inflation, investors are concerned about the possibility of a slower rate cut pace in 2025. Morgan Stanley suggests this could result in a conservative stance in the market's pricing of a January rate cut.
Inflation Data May Alter Market Expectations
November's CPI data signaled a drop in housing inflation, a key factor influencing Federal Reserve policy. According to Morgan Stanley's analysis, the slowdown in housing inflation will persist, supporting future rate cuts. Core PCE data indicates that if the annual growth rate of housing inflation remains at 2%, the core PCE inflation rate could fall below 1% in the coming months.
Although the current market expectation for a January rate cut by the Federal Reserve is only 25%, Morgan Stanley believes this probability may be underestimated. The declining trend in housing inflation and increased Fed confidence in inflation may lead to consecutive rate cuts in December and January.
Market's Cautious Outlook on 2025 Policy
Currently, the Federal Reserve's policy outlook is still influenced by its "data-dependence." Morgan Stanley anticipates that the Fed's 2025 rate dot plot median will likely remain around 3.375% for three months. Powell's language during press conferences could reinforce this expectation while emphasizing policy adjustments based on economic data.
Morgan Stanley also warns investors not to overinterpret Federal Reserve officials' comments. The "noise" and "signal" of inflation data need to be correctly understood. Particularly, the continuous slowdown in housing inflation will be a key driving force, helping the Fed formulate a clearer policy path.
The continued decline in inflation, particularly the trend in housing inflation, could support consecutive rate cuts by the Federal Reserve in December and January. However, the market remains cautious about the pace of rate cuts in 2025, and policy prospects are still filled with uncertainty. Investors need to pay attention to Chair Powell's statements and the impact of future economic data on the policy path.
