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Surprise Fed Poll of 2 Rate Cuts in 2025 May Depend on Labor Market
Yields rose Wednesday after the Fed dot plot suggested just 2 cuts in 2025 from 4 in September. The labor market may drive what really happens.
- Fixed Income Insights
- Markets & Economy
- Federal Reserve
- Monetary Policy
Key Points
What it is
After cutting its policy rate on Wednesday, the Fed surprised investors with a poll suggesting just two rate cuts in 2025.
Why it matters
Interest rates for 2025 likely depend on how investors perceive the path of rate cuts.
Where it's going
We think the cooling U.S. labor market increasingly will weigh on the Fed’s rate decisions next year, alongside inflation.
The quarter-point Fed rate cut on Wednesday was widely anticipated. The main surprise was in policymakers’ views on the appropriate pace of rate cuts next year, which was slashed in half and now shows the equivalent of only two 25-basis-point cuts for all of 2025. The market reaction was swift, with yields rising sharply. But Fed Chair Jay Powell cautioned that these projections “are not a committee plan or decision.” Investors would do well to take his cautionary note to heart. Let’s take a closer look.
The so-called “dot plot,” which summarizes policymakers’ views on the appropriate path of monetary policy over the next couple of years, is a collection of individual views that are put together independently before certain policy meetings. So we think Powell is right when he says that those projections are not a committee decision nor a plan of action. That said, the case remains that policymakers have less appetite to cut rates in 2025 than the equivalent of four 25-basis-point cuts the survey showed in September, the last time the Fed published the dot plot.
Powell noted that the slower pace of cuts for next year reflects both the higher inflation readings we’ve had this year and the expectation that inflation will be higher than they had previously anticipated. In addition, the projections materials showed a marked shift in policymakers’ views on inflation risks, with most now seeing those risks as weighted to the upside. However, Powell noted on a couple of occasions that “the story of why inflation should be coming down is still intact.”
Again downplaying the revised projections, Powell said that “the actual cuts that we make next year will not be because of anything we wrote down today. We’re going to react to data.” And on many occasions, he brought attention to data on the labor market, which he characterized as cooling “so far in a gradual and orderly way,” but as something they are closely watching. So, from our perspective, the labor market has become more of an equal partner, alongside inflation, in . And the prospect that the ongoing “orderly cooling” in the labor market becomes “too-much cooling” will likely lead the Fed to cut rates next year by more than it currently anticipates.
Main Point
Projections, not a plan of action
While the Fed’s dot plot survey showing just two rate cuts in 2025 caused yields to surge Wednesday, Fed Chair Jay Powell emphasized that the projections are not a plan of action. Increasingly, we think the cooling labor market has become a equal partner with inflation in terms influencing how much the Fed will cut rates next year.
Antulio N. Bomfim
Head of Global Macro – Global Fixed Income
Antulio Bomfim, head of global macro for the global fixed income team, oversees interest rate strategy, systematic volatility, liquidity and monitoring of systemic risk globally. He is also responsible for the firm’s global liquidity management business.
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