From the lame duck session to a new administration, how to think about rates, macro and the Fed ahead

This week George Goncalves, MUFG Head of U.S. Macro Strategy, walks us through some of the key topics and our views from the November monthly report, US Macro2Markets Outlook: Markets feel adrift post-election, now what?

George reiterates the house call that the Fed will likely deliver another 25bp cut for 2024, bringing the total to 100bps of cuts for this past year. We think since this is the last 25bp remaining cut, that was part of the September SEP forecast, why skip it. Furthermore, the FOMC minutes were dovish and flagged that market functioning is now in focus (with the Fed thinking about reducing the RRP rate by 5bps) why skip at year-end and create unnecessary volatile during an illiquid period for broader markets. Not to mention skipping now could come off as political since its in their forecasts from before the election outcome. The only way the Fed does not deliver a cut is if the NFP data meaningfully beats expectations and the prior weak reports get revised higher. We are skeptical that the latest NFP report will be strong given that the data collection period was during the election week when the focus was elsewhere for most in the US. And let’s not forget recent labor market trends have been decelerating.  

Further afield we believe the Fed will cut another 75bps in 2025, where we expect them to skip in January after the inauguration, and then cut once per quarter in March, June, and September bringing rates into the upper 3% levels. We note that there are many different possible Fed rate paths once we get past mid-2025, as there are a variety of Trump policies that could alter the economic landscape. If the economy were to weaken and not respond as quickly to Trump’s pro-growth policies, or worse, the tariffs and immigration policies lead to reduced growth, our bias is for the Fed to cut more. We expect the full interest rates curve to steepen, starting in Q1-2025 (with the 2yr reacting to the Fed still in cutting mode) and continue through the end of the year, as the focus shifts to how the US will allocate and fund US Treasury debt. How the US handles the deficit and debt ahead will also be a main focus of the incoming new Treasury Secretary.