Matthew Luzzetti, chief U.S. economist at Deutsche Bank, told Bloomberg TV he thought the Fed would do a 25-basis-point rate cut in December and then pause for the entirety of 2025.
When asked what prompted his view, he mentioned two factors.
“One, it’s just that the details of our underlying economy that we see now,” Luzzetti said. He mentioned the apparent continued resilience of consumers given spending patterns. In chained 2017 dollars — providing equivalent values in dollars and accounting for inflation — personal consumption expenditures were up 0.1% in June; 0.4% in July; 0.1% in August; 0.5% in September; and 0.1% in October, according to Bureau of Economic Analysis (BEA) data.
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Disposable (after taxes) consumer income, again in chained 2017 dollars, was up 0% in June, July, and August, and then 0.1% in September and 0.4% in October. Additionally, the Conference Board’s regular series of consumer confidence surveys showed an increase in November after three monthly declines.
Two GDP growth was 1.6% in Q1, 3.0% in Q2, and 2.8% in Q3, all seasonally adjusted annualized figures provided by the BEA. It’s difficult to argue for rate cuts as stimulation when growth has been reasonably steady.
But then, inflation has moved back higher than expected, with the PCE price index, the preferred measure by the Federal Reserve, up to 2.3% year-over-year in October and 2.8% for core inflation (without food or energy). Luzzetti also mentioned a “more resilient and more stable” labor market than expected. Overall, enough factors suggest no pressing need to reduce interest rates.
“Overlay with that, policy changes that we expect: extensions of tax cuts, perhaps further tax cuts, tariff policy, which lifts inflation — all of that leads to this dynamic of stronger growth, we think, higher inflation that stays above 2.5%, and a neutral policy rate [the short-term rate that neither encourages growth or reduction of the economy] that’s close to 4%, and the Fed’s above 4%,” leaving no room for continued cuts in 2025, Luzzetti said.
He said all this should become more obvious when the Fed updates its forecasts. December may add some of this, but the full details might become obvious only in the March to June range.
The minutes from the November meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve suggest a “gradual” approach to monetary policy change is under consideration.
There are also voices predicting higher rate cuts. Goldman Sachs projects the Fed to cut the federal funds rate from 4.5% to 4.75% now to between 3.25% and 3.5%. And Citi Research U.S. Economist Veronica Clark expects a 50-basis-point Fed rate cut in December.
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