ING Group expects the US Federal Reserve to cut interest rates only in December as the central bank may wait for further economic cues.
On Tuesday, US Federal Reserve Chair Jerome Powell stated that the Fed would observe economic developments before making a decision on reducing its key interest rate. This position directly contradicts President Donald Trump’s demands for immediate cuts.
“For the time being, we are well-positioned to wait to learn more about the likely course of the economy before considering any adjustments to our policy stance,” Powell said in prepared testimony for the House Financial Services Committee on Tuesday.
Trump’s call for significantly lower policy rates and Fed Governors Chris Waller and Michelle Bowman’s openness to a July rate cut make Powell’s non-committal stance unsurprising, according to ING Group.
“The testimony appears to be an expanded version of the FOMC statement from last week when they held policy steady,” James Knightley, chief international economist, US, at ING said in a report.
Powell noted the “solid” state of both the labor market and the broader economy. While acknowledging that “inflation has eased significantly from its highs,” he points out it “remains somewhat elevated relative to our 2 percent longer-run goal.”
Rate cut probabilities
Markets are currently anticipating 56 basis points of cuts in the second half of the year. The most probable scenario involves a September cut (23 basis points priced in) followed by a December adjustment.
Knightley said:
We don’t disagree with 50bp of cuts for the second half of 2025, but given that July and August are when the pass-through from tariffs will be at their maximum, the Fed probably won’t have the information to say that tariffs are not going to lead to longer term inflation by September’s FOMC meeting.
ING suggests the Fed may want to see confirmation of softer prints in September and October CPI reports, given the stinging criticism it received when it said inflation would be “transitory” post-pandemic, only for it to hit 9% in 2022.
“Hence why we tend to think they may wait until December, but go by 50bp in response to cooler jobs numbers,” Knightley added.
Early possibilities of rate cut
A rapid slowdown in job creation could trigger an earlier move in terms of cutting rates by the Fed.
In its most recent edition, the Fed’s own Beige Book was notably pessimistic about jobs in the US, indicating that “widespread comments suggested uncertainty was delaying hiring.”
Every district reported a decrease in labor demand, characterized by reduced working hours, less overtime, hiring freezes, and plans to cut staff, according to the Beige Book.
Both initial and continuing jobless claims are showing an upward trend, while labor demand indicators, such as those found in the ISM report, appear less robust.
Knightley noted:
Nonetheless, with the uncertainty over inflation, the Fed would likely need to see clearer evidence of softness in the form of subdued payrolls growth and a rising unemployment rate to trigger an early move.
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