Key takeaways
- J.P. Morgan Research expects the Fed to cut rates by another 25 bp in December, with further cuts only taking place once per quarter in 2025.
- In addition, the Fed’s terminal rate is now forecast to be 3.5% instead of 3.0%.
- While the election results could impact the inflation outlook, J.P. Morgan Research’s 2025 forecast — which sees GDP growth slowing to around 2% — remains unchanged.
Updated: November 19, 2024 | Originally published: September 24, 2024
The Federal Open Market Committee (FOMC) opted for a cut of 25 basis points (bp) at its November meeting, bringing the federal funds rate down to 4.50–4.75% — largely in line with market expectations. This move follows its bold 50 bp cut in in September.
With the FOMC noting that risks to inflation and employment are roughly in balance, what could its next move be?
“Regardless of exactly what policies are introduced, a change in the party occupying the White House creates some new unknowns for the economy. This argues for a more gradual pace of interest rate cuts.”
Michael Feroli
Chief U.S. economist, J.P. Morgan
How big could the next Fed rate cut be?
Looking ahead, J.P. Morgan Research expects the Fed to cut rates by another 25 bp in December, with further cuts only taking place once per quarter in 2025 — in contrast to its previous forecast for a 25 bp cut every meeting.
In addition, J.P. Morgan Research now looks for the Fed to conclude its cutting cycle once the policy rate reaches 3.5%, versus its earlier forecast for a 3.0% terminal rate.
“Since the September FOMC meeting, the data has generally surprised to the upside. In addition, the election has produced an appreciation in risk assets. Regardless of exactly what policies are introduced, a change in the party occupying the White House creates some new unknowns for the economy,” said Michael Feroli, chief U.S. economist for J.P. Morgan. “All of these factors could argue for a more gradual pace of interest rate cuts.”
The Fed’s terminal rate is now expected to be higher
The Fed’s terminal rate is now projected to be 3.5%, up from the previous forecast of 3.0%.
How could the election results impact future Fed policy?
While the FOMC’s recent statement provided no hint of how the Fed might respond to any election-related changes in policy, Republican proposals could have an effect on the inflation outlook.
The most pressing issue is how assertively President-elect Trump pushes forward with his campaign promises on immigration and trade. “It appears very likely Trump would immediately end the Biden-era asylum programs and take other executive actions to suspend or ban certain types of immigration. This could return the breakeven level of employment growth to a pre-pandemic one in the ballpark of 100,000 per month, and inflationary implications are likely minimal,” Feroli noted.
On the other hand, there is less clarity around trade. “We think odds of a 10% across-the-board tariff in 2025 are low, in part for procedural reasons. China, on the other hand, is likely to face significantly higher effective tariffs,” Feroli added. “We have previously noted that a 60% tariff on China could raise the price level a bit over 1%, assuming tariffs are fully passed through to consumers. But in practice, the effect could be smaller if higher tariffs are absorbed in business margins or if there is substitution away from China toward other suppliers.”
Despite these uncertainties, the Fed has communicated confidence in slowing inflation and endorsed gradually easing back toward neutral. Similarly, J.P. Morgan Research’s 2025 forecast, which sees GDP growth slowing to around 2%, remains unchanged.
“Our base case is that the prospects for policy changes that boost growth and those that restrain it are roughly offsetting. Specifically, while lower net immigration and higher tariffs should be a drag on growth, a less stringent regulatory backdrop should yield positive sentiment effects. The prospect of tax cuts could also lift sentiment immediately,” Feroli said. “Consequently, we have left our year-ahead GDP forecast largely intact.”
Related insights
-
Global Research
Will mortgage rates continue to go down?
September 04, 2024
How much are mortgage rates in the U.S. expected to fall? And what does the economic backdrop mean for the wider housing market?
-
Global Research
The probability of a recession now stands at 35%
August 15, 2024
Softer-than-expected labor market data and slowing economic growth have increased the probability of a downturn, in our view.
-
Global Research
Global Research
Leveraging cutting-edge technology and innovative tools to bring clients industry-leading analysis and investment advice.
This communication is provided for information purposes only. Please read J.P. Morgan research reports related to its contents for more information, including important disclosures. JPMorgan Chase & Co. or its affiliates and/or subsidiaries (collectively, J.P. Morgan) normally make a market and trade as principal in securities, other financial products and other asset classes that may be discussed in this communication.This communication has been prepared based upon information, including market prices, data and other information, from sources believed to be reliable, but J.P. Morgan does not warrant its completeness or accuracy except with respect to any disclosures relative to J.P. Morgan and/or its affiliates and an analyst's involvement with any company (or security, other financial product or other asset class) that may be the subject of this communication. Any opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This communication is not intended as an offer or solicitation for the purchase or sale of any financial instrument. J.P. Morgan Research does not provide individually tailored investment advice. Any opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. You must make your own independent decisions regarding any securities, financial instruments or strategies mentioned or related to the information herein. Periodic updates may be provided on companies, issuers or industries based on specific developments or announcements, market conditions or any other publicly available information. However, J.P. Morgan may be restricted from updating information contained in this communication for regulatory or other reasons. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise.This communication may not be redistributed or retransmitted, in whole or in part, or in any form or manner, without the express written consent of J.P. Morgan. Any unauthorized use or disclosure is prohibited. Receipt and review of this information constitutes your agreement not to redistribute or retransmit the contents and information contained in this communication without first obtaining express permission from an authorized officer of J.P. Morgan.