Federal Reserve: Higher-for-longer path reshapes cuts – Rabobank

Rabobank's Senior Macro Strategist Bas van Geffen discusses the latest FOMC decision, noting a unanimous 25 bps hike in the Federal funds rate and a shift to a higher policy rate trajectory for similar inflation outcomes. He still expects this to be a one-and-done move, but now foresees fewer cuts, with the terminal rate assumption raised to 3.25-3.50%.

Fed reaction function and rate path

"The FOMC unanimously voted to increase the target range for the Federal funds rate by 25 basis points. And, as our US strategist notes, we got more than we bargained for. The Fed’s new set of economic projections essentially shows a new reaction function."

"The projections indicate that a much higher policy rate trajectory is required to reach a similar inflation outcome."

"Therefore, we still believe it is more likely that yesterday’s decision turns out to be a one-and-done hike and we think that the Fed may be forced to cut earlier next year than they expect."

"However, the new reaction function did force a rethink of that subsequent cutting cycle. We now only expect one cut in 2027 and one in 2028, as we shift our assumption for the terminal rate from 3.00-3.25% to 3.25-3.50%."

"Overall, the FOMC sent a clear message that it is committed to defend its monetary policy independence. In fact, their projections suggest that by the time President Trump leaves office, the policy rate may be higher than when Warsh took the helm at the central bank."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)