TLDR:
• Fed may cut rates in 2025
• Economic outlook remains uncertain
• Political changes impact rate decisions
MANHATTAN (The Thursday Times) — In the latest twist for the global financial markets, Goldman Sachs’ chief economist, Jan Hatzius, has predicted that the Federal Reserve could implement a series of interest rate cuts throughout 2025. According to Hatzius, a weaker employment landscape and looming economic uncertainty are likely to compel the Fed to lower rates four times during the first half of next year. These reductions, he forecasts, would bring the benchmark interest rate down to a range of 3.25 to 3.5 per cent. This forecast, published in a report last Sunday, stands roughly 50 basis points higher than current market expectations, reflecting a cautious yet confident assessment of the unfolding economic narrative.
The prediction emerges amidst broader discussions about the Federal Reserve’s approach in the shadow of electoral shifts and evolving fiscal policies. Hatzius remains convinced that the Fed will follow through on its existing guidance of two rate cuts by the end of 2024. However, he acknowledges significant uncertainty about the pace and final destination of rate adjustments next year. The Federal Reserve’s current chair, Jerome Powell, has reiterated that the central bank will operate independently, basing decisions on data and not political pressures. But as the nation heads into a presidential election year, speculation abounds on how new fiscal and economic policies could reshape the Fed’s strategy.
Balancing economic data with policy pressures
The Federal Reserve, long seen as an anchor of stability, faces an increasingly complex environment as it navigates economic recovery, inflation control, and political expectations. The jobs market has shown signs of softening, with the latest employment report underperforming analysts’ projections. Despite these challenges, the American economy continues to show pockets of resilience, with third-quarter GDP growth estimated at 2.8 per cent and corporate earnings holding strong. Yet, as inflationary pressures ease, the case for a dovish pivot by the Fed gains traction.
Hatzius’s forecast comes as bond markets remain volatile, adjusting to anticipated monetary easing and potential election-induced economic shifts. Even as market participants brace for changes, the Federal Open Market Committee (FOMC) may choose a measured approach. “We can run simulations of different potential policies, but we would never try to make policy decisions based on the outcome of an election that hasn’t happened yet,” Powell stated, emphasising the Fed’s commitment to data-driven policymaking.
Election dynamics and economic uncertainty
The 2025 interest rate trajectory is fraught with complexity, influenced by potential shifts in federal tax policies, spending patterns, and regulatory frameworks. A new Congress and possibly a new president could alter the economic playing field dramatically. Hatzius points out that while the Fed remains committed to economic stability, policymakers may need more clarity on fiscal policy post-election before deciding on a longer-term monetary stance.
The upcoming presidential elections introduce additional risks and uncertainties. The Tax Cuts and Jobs Act of 2017, due to expire next year, could become a significant battleground in Congress. If tax breaks are not extended, consumer and business spending patterns could shift, affecting inflation and growth forecasts. The Fed will be forced to adapt swiftly to any changes in fiscal policy, but Powell’s continued leadership might be a stabilising factor, even as his term remains a topic of political debate.
The bond market and long-term rate expectations
Interest rate cuts would have far-reaching implications, especially for bond markets. Mike Goosay, Chief Investment Officer for global fixed income at Principal Asset Management, believes bond yields could see an upward adjustment depending on the election outcome. He also predicts that fixed income could benefit from a “duration tailwind” as the Fed’s rate cuts ease financial conditions. Investors are already recalibrating expectations, with some betting on a softer monetary landscape that could support economic expansion.
Despite optimism from sectors anticipating lower borrowing costs, the economic outlook remains highly uncertain. The convergence of election outcomes, labour market shifts, and global economic pressures will determine the extent to which the Fed can continue easing. Hatzius and other financial experts warn that even well-informed forecasts carry substantial risks, and the Fed’s cautious approach will be crucial in navigating this economic tightrope.
