US | Divided Fed set to proceed with final 2025 rate cut

Summary

The Federal Reserve is expected to deliver a third consecutive 25bp rate cut to 3.50-3.75% amid a softening labor market. However, a highly divided FOMC will likely signal a pause for early next year, as the room for risk-management cuts has run its course and inflation remains near 3%.

Key points

• Key points:
• Economic activity remains resilient, driven by AI capital spending, while the labor market shows softening signs with September payrolls rising by 119,000 and the unemployment rate ticking up to 4.4%.
• Despite a prolonged data blackout due to the government shutdown, soft indicators suggest limited pass-through from tariffs to consumer prices, keeping inflation risks secondary to labor concerns.
• Following dovish remarks from key officials like Williams and Waller, futures markets now assign an approximate 90% probability to a rate cut in the upcoming December meeting.
• The updated dot plot is expected to reflect a divided committee, likely pointing to just one 25bp cut in 2026 and another in 2027, bringing rates to 3.50% and 3.25% respectively.

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