The FOMC, the main policymaking body of the U.S. Federal Reserve, is expected to lower the policy rate by 25 basis points this Wednesday, despite internal division within the Committee. This would bring the rate to a range of 3.50%–3.75%. The move is driven by signs of weakness in the U.S. labor market and a softening in consumer strength. That is what Michael Krautzberger, CIO Public Markets at Allianz Global Investors, states.
Fed Chair Jerome Powell has previously emphasized that a rate cut is not guaranteed, particularly because fewer economic data have been available due to the recent government shutdown. He compared the situation to “driving in the fog,” indicating that the Fed is proceeding more cautiously and may postpone further easing until 2026.
Nonetheless, we believe the Fed will ultimately cut an additional 50 basis points, bringing the rate to a range of 3.25%–3.50% by mid-2026. That is less than what the market currently expects.
The updated projections from FOMC members, which will also be released during the meeting, will be worth watching. The September projections showed conflicting signals: GDP near potential, unemployment moving toward its natural rate, and inflation returning to target, yet still expecting substantial rate cuts.
The initial positive market reaction to the rate cut may be tempered by cautious comments from Chair Powell, who will likely stress the division within the Committee and the diminishing room for further accommodation now that policy rates are closer to neutral. Treasury yields may decline slightly, but with the 10-year yield already around 4%, the scope for further decreases appears limited.
If the Fed unexpectedly decides not to cut rates, it could cause market turbulence and temporary price corrections, as markets are currently pricing in a cut.
