We expect the Fed to deliver a 25bp rate cut at next week’s FOMC meeting and signal that more reductions are likely to follow over the remaining meetings this year. The median dot of the updated SEP will likely show 75bps of total reductions for 2025, 25bps more than in June. We expect four dissents against the decision to ease 25bp. Governors Waller, Bowman, and Miran (if confirmed in time) will likely vote in favor of a larger 50bp rate cut, while we expect a hawkish dissent from a regional bank president – most likely Kansas City Fed president Schmid. Stephen Miran could well be voting next week, and Lisa Cook might not be. Either way, it will not affect the FOMC going for a 25 bp cut. After cutting policy rates 25bp, Chair Powell is likely to guide toward a series of further rate cuts, noting that downside risk to employment has increased further following recently softer jobs data. We expect median “dots” to signal 75bp of rate cuts this year and for Chair Powell to indicate that rate cuts at upcoming meetings are likely given the shifting balance of risks. We have been highlighting for the past few months that the employment mandate of Fed will take priority over it’s price stability mandate sooner than later. We believe employment might come under more stress as we see job losses picking up and labor demand go down further. We expect Oct NFP (to be released in Nov) to be -ve with UR at 4.5%. Is there a case for a 50bps cut: Yes, there is a 20% probability that FOMC goes for a 50-bps cut but doing that will be an admission of being late by Fed Chair Powell of which Trump frequently accuses him. In addition, it might spook the stable US equity markets about what the Fed can see and it does not. Also, it might raise questions about the independence of Fed and might look like a decision under pressure from President Trump. Hence, we rule it out. Our base case is 75 bps of cuts in REMCY25 and another 50-bps cut in Q1CY26. This has been our view since past few months and we maintain the same. We see current bump up in super core service inflation as transitory (falling employment-lower wages-lower service demand) & goods inflation to peak out by Oct CPI. By Nov the employment inflation mix might have turned decisively in favor of Fed rate reaching to terminal 3% rate by Q1CY26.
