Fed one last time on autopilot – Commerzbank

Tonight, the Federal Open Market Committee (FOMC) of the US Federal Reserve meets for the last time this year to decide on monetary policy. It would take a miracle for the FOMC to do anything other than cut interest rates by 25 basis points. Based on futures contracts, the market is 95% certain it will take such a step, and the vast majority of economists surveyed by Bloomberg also see it that way, Commerzbank’s FX analyst Volkmar Baur notes.

Market expects two further interest rate cuts next year

“Nevertheless, it may be worth to pay attention this evening. With this last cut, the ‘autopilot’ part of the US interest rate cycle should be over. And even if it has always been emphasised that no decision has been made in advance, from the upcoming meeting at the end of January, this should really apply. So, it will depend very much on what Jerome Powell says about a possible pause in January and what the forecasts for the whole of 2025 show.”

“The market is now only expecting two further interest rate cuts next year, while the Fed had still been expecting four in its last forecasts. Lowering these expectations to three would make sense. There is room for manoeuvre, both to do more than the market is currently expecting and to further reduce the number of expected steps at the next round of forecasts.”

“Therefore, here too, it will depend on Powell's tone. A focus on the fact that many things are in flux and that one has to wait and see would be expected. A higher level of conviction in one's own forecasts and expectations, on the other hand, could cause the market to reprice again and put some pressure on the US dollar.