Nomura has said that the U.S. Federal Reserve is no longer expected to cut interest rates at its December policy meeting, making it the first global brokerage to signal a pause in the central bank’s rate-cutting cycle in the wake of Donald Trump’s election win. Nomura now expects the Fed to deliver only two 25-basis-point (bp) rate reductions at its March and June meetings in 2025, leaving the brokerage’s Fed funds rate projection unchanged at 4.125% through next year.
The new forecast reflects that the economy has decelerated and will likely stay below its potential output, or 2%, for some time. That would keep inflation low and reduce the need for the Fed to lower rates.
Nomura expects core prices to remain broadly stable in the near term, with the core personal consumption expenditures (PCE) index rising by 1.5% this year and 2.8% in 2024. The firm believes the Fed will only reduce its quantitative tightening policies once it has confirmed a recession in the second half of 2024.
This means it will be easier to jolt the economy back into growth mode by cutting interest rates later this year if the global economy regains some strength. Nomura said it was unlikely that the Fed would cut again this month or in January, given that inflation had already started to fall and auto loan conditions remained tight.
In the past, when the Fed lowered its policy interest rate to cope with financial pressure, such as after the collapse of long-term capital management firms and Russia’s default in 1998, it was often able to increase rates again quickly. However, Nomura does not think the current economic situation is sufficiently severe for the Fed to regain its appetite for quick rate increases.
Nomura’s decision marks a significant departure from consensus among investors and economists. Most major banks, including Goldman Sachs and J.P. Morgan, still see a rate cut in December. Nomura’s stance may challenge conventional wisdom and raise questions about how markets will price Fed moves as the year progresses. The CME Group’s FedWatch Tool currently reflects a 34.7% chance of a pause, which could prompt some traders to change their outlook. This underscores the sensitivity of market forecasts to shifts in the Fed’s stance, which plays a pivotal role globally.
As the Fed’s decisions mold global investment strategies, analysts say they are becoming more attuned to signals from the central bank. For instance, Fed Chairman Jerome Powell’s recent comments on the role of interest rates have been more measured than some had expected. That suggests that the Fed’s policymakers have become more concerned about downside risks to their dual mandate of maximum employment and price stability than had previously been reflected in market pricing. This makes the likelihood of a pause in the rate-cut cycle more significant than it might otherwise seem. However, it also means that subsequent cuts will be more minor than many had expected.
