Doha: The Qatar National Bank (QNB) has announced that the United States Federal Reserve (Fed) is anticipated to continue cutting rates in 2025 and throughout 2026. This forecast is based on a minimal consensus within the Fed on the necessity to resume rate cuts, alongside a weakening economy and a growing 'dovish' majority within the Board of Governors and the Federal Open Market Committee (FOMC) in the coming months.
According to Qatar News Agency, the QNB's weekly economic commentary stated that in recent months, the focus of economic policy discussions has shifted due to uncertainties stemming from the Trump administration. This has compelled the Fed to adapt its strategies rather than lead the discourse. This reactive approach was evident at the recent Jackson Hole symposium, where key economic stakeholders discussed the increasing politicization of economic policies.
The heightened unpredictability on fiscal and trade matters has led to record highs in the US Economic Policy Uncertainty Index, complicating growth and inflation forecasts. While there has been some moderation since the peak following the 'Liberation Day' tariffs, uncertainty remains high, surpassing levels seen during significant past crises such as the Global Financial Crisis, the Euro debt crisis, and the Covid-19 pandemic.
Operating in this environment is challenging for the Fed. Medium-term policy rate expectations have fluctuated significantly, reflecting a volatile market consensus regarding the Fed fund rates' trajectory over the next quarters. Fed funds future yields, which fell in mid-2024 due to rapid disinflation and expectations of aggressive monetary easing, increased as Trump led the US election campaign with a pro-growth agenda. However, yields have since decreased due to negative impacts from aggressive trade measures on investor and consumer sentiment, stabilizing in recent months.
Investors expect the Fed to continue the rate-cutting cycle that began in September 2024, with two additional 25 basis points cuts anticipated by the end of 2025 and further reductions throughout 2026, targeting a cyclical terminal rate of approximately 3% by late 2027.
In the QNB's view, current market expectations align with the macroeconomic environment, providing the Fed with room for further easing. The commentary highlights three main supporting factors: Fed officials' communication of expected rate cuts, the economic slowdown coupled with negative policy shocks, and political changes within the Fed's leadership favoring a 'dovish' stance.
Despite divisions within the FOMC, most Fed officials anticipate rate cuts soon, aligning with the June 2025 Fed 'dot plot' projections. The economy's gradual deceleration and expected medium-term inflation normalization support this view, even with short-term inflation risks.
Moreover, the economic slowdown and policy shocks necessitate further cuts. The US economy's adjustments have eased supply/demand pressures, reflected in weakening labor markets. With the unemployment rate rising and labor metrics weakening, additional labor market deterioration is expected, emphasizing employment as a priority over inflation for the FOMC.
Finally, political dynamics and shifts in the Fed's Board of Governors composition are likely to strengthen 'dovish' influences. President Trump's preference for policy rate cuts and a new Fed Chairman aligned with his views, along with recent FOMC member changes, support deeper rate cuts.
Overall, despite policy uncertainties and above-target inflation, the Fed is expected to cut rates further in 2025 and 2026, driven by consensus on the necessity for rate cuts, economic weakening, and a growing 'dovish' majority within the Fed's leadership.