Top of the Morning: FOMC takeaways and 2025 outlook
The desk believes that the recent FOMC meeting has paved the way for a shift in monetary policy dynamics, leading to a slower pace of rate cuts moving forward. Per the full note from UBS, the Federal Reserve's decision to cut interest rates by 25 basis points was anticipated and signifies a total reduction of 100 basis points since September 2024. Market forecasts suggest that any further cuts will be gradual, particularly given the increased growth and inflation projections detailed in the updated dot plot. This gives traders a clearer perspective as they strategize their positions for 2025 and beyond, especially against the backdrop of looming economic uncertainties and evolving Fed policies.
What the desk is arguing
The desk holds the view that the Fed's latest rate cut will not only slow the pace of monetary easing but may also be indicative of a more cautious approach going into 2025. Recent updates reveal a shift in the Fed's growth and inflation outlook, which has implications for interest rates moving forward.
The decision to trim rates was in line with market expectations; however, the new language in the FOMC statement suggests that the aggressive rate-cutting we saw over the past months is likely to become a relic of the past. Current forecasts are grounded in a new 100 basis point cut, bringing the target rate to 4.25%-4.5%. This reflects a nuanced understanding of the economy's resilience and incoming data, particularly with unemployment and inflation expectations.
Where it sits in our coverage
UBS’s Chief Investment Office forecasts a target rate of 1.075 for the USD/JPY as we head into 2025, while other firms provide a varied outlook: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
Currently, our target aligns closely with jpmorgan, but notably diverges from bofa, indicating that traders are split on their outlook regarding the strength of the dollar against the yen. Our stance currently leans toward the upper range of the predictive spread based on firm forecasts.
How other firms see it
Firms such as jpmorgan and citi are aligned in their more optimistic outlook for the USD, forecasting strength against the JPY, reflecting a belief in a cautious Fed, whereas bofa holds a contrary view predicting weaker dollar performance.
Additionally, currency pairs such as EUR/USD or USD/CHF will likely reflect the ongoing shifts in monetary policy as traders adjust their positions based on the FOMC's evolving guidance.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01FOMC cuts rates by 25 basis points, signaling slow down on future cuts.
- 02Updated projections show hourly rises in inflation and GDP expectations.
- 03Market positioned for cautious Fed movements as we head into 2025.
- 04Key consideration for traders moving forward: economic resilience amidst rate adjustments.
Market implications
Watch for USD performance against the JPY in the wake of the latest FOMC meeting results and amid broader economic indicators that may shift sentiment. A level to monitor is the USD/JPY around 1.10, aligning with **jpmorgan**'s forecast as positioning strategies evolve.
Risks to this view
The primary risk to this outlook would be a sudden shift in economic data, particularly if inflation data indicates stronger-than-expected consumer price growth. Such signals could prompt the Fed to adopt a more aggressive stance, reinstating fears of higher rates.
Hi everyone, Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel. For today, we will spend some time reflecting on this week's FOMC meeting.
We'll dive into the outcome, the press conference from Jerome Powell, as well as the market response. Joining us for the conversation today, glad to welcome back Senior Economist Americas with the UBS Chief Investment Office, Brian Rose. Brian is joining us for what will be our final Top of the Morning conversation for 2024.
So with that, Brian, thank you for dropping by on this Friday morning. Nice to have you back and looking forward to hearing your insights. Thanks, Dan.
Good morning, everyone. So with that, Brian, let's begin by examining the Fed statement as well as the press conference delivered by Chairman Jerome Powell. What did you take away from the Fed this week?
Well, first, let me remind everyone, in case you missed it, the Fed cut rates by 25 basis points this week. That was in line with expectations, and it brings the total rate cuts since September to 100 basis points. The current Fed funds target range is four and a quarter to four and a half percent.
And now the FOMC statement was a little changed from the last one, but they did insert a new phrase that was meant to signal to the market that the pace of rate cuts will slow from here. So if the Fed generates 100 basis points in four months, they're going to slow from here. But what was really more significant was the updates to the Fed's economic projections, especially the dot plot, which is an indication of the future path of interest rates in the years ahead.
Now, the last time we had those projections was in September. The actual outcome for both growth and inflation exceeded the Fed's previous projections. And because everyone knew this, and because of it, there was a strong consensus that the dots would rise from the September levels.
But in the end, those dots went up by more than expected. So going back to September, the median dot implied another 100 basis points in rate cuts over the course of 2025. But the new dots show only 50 basis points of cuts, and it really wasn't close.
So only five of the 19 dots show 75 basis points or more of cuts next year. So there's a strong consensus now on the Fed that they're not going to be cutting rates very much next year. And another thing that didn't get a lot of attention was that if you look at this year's dots, so the dots that say, what's the appropriate level of interest rates now, four of those dots called for no cuts at this meeting.
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