Commerzbank’s Dr. Christoph Balz and Bernd Weidensteiner interpret recent data and Fed communications as pointing to stable policy rates in coming months. Softer US inflation, a balanced FOMC, and forecasts for Fed funds at 3.75% through early 2027 before cuts to 3.50% support the view that markets overprice further tightening and that the next major move will be downward.

Policy on hold before eventual cuts

"The minutes of the Fed’s latest meeting reflect the concerns of Fed officials regarding inflation trends. There was agreement that inflation risks remain tilted to the upside and that the labor market is likely to remain stable, at least in the short term. Some meeting participants therefore even saw grounds for an interest rate hike, but ultimately supported the decision to keep key rates unchanged."

"During the discussion on the monetary policy outlook, significant differences of opinion emerged. For many meeting participants, the most likely scenario is that the policy rate at the end of the year would be unchanged or slightly lower than it is currently."

"Many other meeting participants assumed that rates would be higher by that time. The fact that the minutes used the word “many” to describe the size of both groups suggests that they are roughly equal in size."

"This means that the current consensus within the Fed is finely balanced, giving Board Chairman Kevin Warsh the opportunity to exert a decisive influence in one direction or the other. "

"Ultimately, however, economic data will be the deciding factor. In any case, Warsh advised market participants to base their assessment of Fed policy on these facts and not to focus too much on statements by Fed officials. We continue to expect that the Fed will not raise its key interest rates in the coming months."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)