Nomura Securities has forecasted that the Federal Reserve will pause rate cuts during its December policy meeting, marking it as the first global brokerage to suggest such a move following Trump's election victory. Nomura anticipates the Fed will only reduce rates two more times next year, specifically in March and June, with each cut being 25 basis points, maintaining the federal funds rate forecast at 4.125% for the interim.
Currently, the Fed's benchmark rate ranges between 4.50% to 4.75%, having decreased by 75 basis points this year. However, other investment banks like Goldman Sachs and JPMorgan still expect a 25 basis point cut next month. Last week, Fed Chair Jerome Powell indicated the strong economic indicators allow for a careful approach to rate cuts. Powell highlighted that there is no urgency signaled by the economy to rush rate reductions.
Nomura's analysis suggests that recent hawkish comments from policymakers, citing strong economic growth and potential inflation rise, indicate a lack of urgency for further rate cuts. This view aligns with the reluctance to reduce rates following Trump's presidential win, as there are concerns that his policies could fuel significant inflation. Wall Street is digesting possible inflation pressures from anticipated tax cuts, higher tariffs, and immigration restrictions under Trump's administration.
Rob Subbaraman, Nomura's Singapore-based Head of Global Markets Research, noted the many variables introduced with Trump's presidency have created significant market uncertainty. He also engaged with Trump's social media platform, Truth Social, to monitor developments. Nomura's report adds that anticipated tariff impositions may increase actual inflation by next summer, suggesting potential for the Fed to delay rate cuts for a more extended period.
Recent data from October showed the U.S. CPI rose 2.6% year-on-year and 0.2% month-on-month, with core CPI increasing 3.3% annually and 0.3% monthly, excluding volatile items like food and energy. According to CME Group's FedWatch tool, traders currently assign a 34.7% probability for the Fed to pause rate cuts in December.
From Nomura's perspective, pausing rate reductions appears prudent, with expectations for longer halts after potential cuts in June next year, extending up to March 2026.
