‘Fed will cut interest rates, despite divisions’
“The FOMC, the most important policy body within the Federal Reserve, is expected to cut the policy interest rate by 25 basis points next Wednesday,” says Michael Krautzberger of Allianz Global Investors. “This will happen despite the internal division within the FOMC. The interest rate will then be in a range of 3.50-3.75 percent. This move is because the US labor market is showing signs of weakness and the strength of the American consumer appears to be less strong.”
“Fed Chairman Jerome Powell has previously emphasized that a reduction is not certain, especially because less economic data is available due to the recent shutdown. He compares the situation to “driving in a fog”, which means that the Fed will proceed more cautiously and may postpone a cut until 2026. However, we believe that the Fed will ultimately cut an additional 50 basis points to a rate between 3.25% and 3.50% in mid-2026. That is less than what the market now expects,” says Krautzberger.
“During the meeting, the updated estimates from the FOMC members will also be interesting. September’s showed conflicting signals: GDP close to potential, unemployment falling towards natural levels, inflation back to target, but still significant interest rate cuts expected. The initial positive reaction to the rate cut may be tempered by cautious comments from Chairman Powell, who are likely to highlight the divisions within the committee and the diminishing scope for further easing as the key rate moves closer to neutral. Bond yields may fall slightly, but with the 10-year yield already around 4%, the additional room for decline is limited.”
According to Krautzberg, the decision not to lower interest rates could cause unrest and temporary price drops, because the market is currently expecting a reduction.