The FedWatch tool shows that the likelihood of further interest rate cuts during this week’s FOMC meeting was almost zero per cent. President Trump demanded rate cuts and lower oil prices early this week, which could also affect inflation.
The Financial Times reported that Trump’s demand for rate cuts was likely to be overlooked during this week’s FOMC meeting since slowing inflation and steady job growth sparked debate over the need for further rate cuts. HSBC U.S. economist Ryan Wang said the Fed was expected to refrain from sending signals for a rate cut, adding that it was a hawkish risk.
According to FT, investors expected the Fed to hold rates at their current level of 4.25%-4.50% after three consecutive cuts since September last year. Investors’ attention will subsequently focus on any shift in outlook as per the remarks and accompanying statement made by Fed Chair Jay Powell in the press conference after the FOMC meeting.
However, the Fed chair is likely to face questions about his early actions and comments from Trump, who this week said he would demand interest rates cut and drop in oil prices. Since November’s election, Trump and Powell have downplayed any friction including the president’s previous calls for the Chair’s exit. Powell also made it clear in November that he planned to serve out his term and maintained that Trump could not remove him.
ECB signals more aggressive interest rate cut policy
Investors expect another interest rate cut on Thursday after Christine Lagarde, the European Central Bank president, came closer than ever to declaring victory over inflation last month. Markets had fully priced in another 0.25% rate cut from Frankfurt’s policymakers. If confirmed, that would reportedly be the fifth reduction since June, taking the key deposit rate to 2.75%, the lowest level in almost two years. The rate cut would also be 1.25% lower than 2024’s peak.
In doing so, markets expect the ECB to discount December’s jump in annual inflation back to 2.4%. The ECB was confident that annual price increases this year would be close to its medium-term target of 2%, while economic growth was likely to be disappointing. However, nearly 50% of the 72 European economists polled by the Financial Times said the ECB had been too slow in lowering interest rates.
“We do not see ourselves behind the curve”
~ Christine Lagarde
Lagarde told CNBC that the ECB was not ‘overly concerned’ about ‘potential repercussions’ for Europe from a potential rise in U.S. inflation. A growing transatlantic gap in monetary policy seemed to be widening, with the Fed becoming much more hawkish in December. Traders were expecting two or three further 0.25% cuts this year according to rate cut levels implied by swaps markets.
Canada expects more rate cuts at the next policy-setting meeting
The Bank of Canada’s economic data revealed that traders expected a 0.25% interest rate cut at Wednesday’s policy-setting meeting, although recent trends in the economic data had left a small question mark.
Swaps markets were pricing in a 90% probability the Canadian central bank would cut its benchmark rate by 0.25% – from 3.25% to 3%. However, the Bank of Canada responded to weaker than expected economic growth and reduced its overnight rate by 0.5% in December for the second consecutive meeting. Subsequently, deliberations from the bank’s governing council showed that the decision between a 0.25% and 0.50% cut was a close call given the mixed data and the substantial cumulation of recent reductions.
Thomas Ryan, North America economist at Capital Economics, said the Bank of Canada’s governing council would opt for a 0.25% policy rate cut as tariffs continued to cloud the economic outlook.
A summary of the bank’s governing council declared that members would be evaluating the need for further reductions in policy rate ‘one meeting at a time’. The summary also pointed out that a more gradual approach to monetary policy was expected going forward. According to Capital Economics, market data showed that Canada’s economic growth was ‘roughly in line’ with the central bank’s forecast.
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