FED: Deutsche See An Additional 2 Cuts In 2025-26 On Growth Slowdown
Deutsche Bank analysts have added Fed cuts to their expected path, as "record levels of policy uncertainty and the sharp tightening of financial conditions has already set the US economy on a weaker growth trajectory."
- The upshot is that they now see a 25bp cut in December 2025, with 2 more cuts in Q1 2026 (ie 3x consecutive cuts through Jan and Mar 2026) before holding. That would get the Funds rate to Deutsche's view of neutral (3.50-3.75%). Previously they hadn't seen any cuts in 2025, and just one 25bp cut in 2026 (Q3).
- They see growth slowing later this year before rebounding in 2026: "the mechanical impact from the tariffs plus the drag from trade policy uncertainty together represent an adverse shock of up to 2 percentage points to growth in the coming quarters. Under a baseline assumption of no further material tariff escalation – and eventually some further tariff relief – as well as a tax package passed this summer, we now see growth slowing sharply in 2025 to 0.9% (Q4/Q4). Growth should then rebound in 2026 to 1.75%."
- Unemployment is seen rising to 4.6% by end-2025, but tariffs are seen pushing core PCE / core CPI near 3.6%/4.0% respectively (on a Q4/Q4 basis), with upside risks.
- Risks are two-sided: "Cuts could come earlier if unemployment rises more sharply, while jittery inflation expectations could push rate reductions into 2026."
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FED: March Economic Projections: Higher Inflation, Weaker Growth, Same Rates
The MNI Markets Team’s expectations for the updated Economic Projections in the March SEP are below.
- The unemployment rate is likely to rise slightly for 2025 alongside a downgrade in GDP growth, while the 2025 core and headline PCE inflation projections are set to rise again. Changes to later years will likely be limited, however.
- More detail on the shift in Fed funds rate medians is in our meeting preview - we will add more color next week.
FED: Market Pricing Nearly 3 2025 Cuts As Conditions Tighten
Amid rising government policy uncertainty, sentiment among businesses and consumers has fallen sharply since the start of the year, while equities and the dollar have reversed their post-election rise. Overall, financial conditions have tightened, even if stress is not yet mounting, e.g. no major widening of credit spreads (the accompanying chart shows the Fed’s financial conditions impulse index but only through January).
- Combined with growth fears, this has affected expectations for the Fed’s rate path, with around 18bp more cuts expected in 2025 compared with what was seen after the January FOMC. 65bp of cuts are priced for the year as a whole. 2025 cut pricing reached 71bp before the February inflation data and 76bp before the February payrolls report.
- A rate cut is seen with near zero probability for March’s meeting, but the first full cut is just about priced for June, with a second nearly priced by September.
- Chair Powell has no reason to endorse or refute these expectations – he’s likely to be happy with a press conference that ends with little discernable change in pricing.
CANADA'S CARNEY ANNOUNCES ELIMINATION OF THE CONSUMER CARBON TAX
- CANADA'S CARNEY ANNOUNCES ELIMINATION OF THE CONSUMER CARBON TAX
