Interview, Fireside Chat, Roundtable
Markets post-Fed: Inflation back in focus
- The Federal Reserve's rate cut cycle is expected to enter a cautious "phase two" in early 2025, likely skipping a January cut while awaiting further inflation progress, with a baseline expectation of two or three cuts potentially starting in June.
- Inflation is projected to decline toward the low twos by the end of next year, driven by rental disinflation and stable energy prices, with core PCE expected to move below 2.5% barring significant tariff impacts, though the underlying trajectory is anticipated to show very modest, gradual improvements.
- Market pricing currently reflects a single cut for next year, creating vulnerability to any signs of cooling labor or inflation data, while sensitivity to downside growth news is expected to increase requiring reassurance on inflation to support valuation.
- Tariffs and immigration are identified as the primary policy risks that could dramatically alter inflation tracks, with the topic expected to dominate market focus during the first quarter, specifically January, while potential deregulation is viewed as a market-positive counterbalance.
- A new Federal Reserve chair is highly likely to be appointed in the spring of 2026, which will shift market attention toward the direction of the new leadership's monetary policy conduct.
- The macroeconomic narrative is segmented by year, defining 2023 as the year of disinflation, 2024 as a period of U.S. growth resilience and the "soft landing," and 2025 as a year of "policy volatility," potential U.S. exceptionalism, and "real changes" including tax reform and deregulation.
- The U.S. policy agenda faces challenges regarding coherent delivery and a potentially "bumpier" government machinery, with the first 100 days expected to be highly actionable following a quiet first week of January.
- U.S. banks and capital markets players are viewed as having a better runway than in early November, with European equities expected to reverse their negative trend, specifically forecasting a 25% rise in the DAX next year.
- Early fears regarding policy risks could paradoxically create a favorable market setup in January if they materialize quickly, allowing the market to position for a shift away from "good news baked in" toward negative surprises on growth.