The US Federal Reserve is no longer expected to cut interest rates at its policy meeting next month, Nomura Holdings Inc said, making it the first global brokerage to signal a pause in the US central bank’s rate-cutting cycle in the wake of Donald Trump’s election win.
Nomura now expects the Fed to deliver only two 25-basis-point rate reductions at its March and June meetings next year, leaving the brokerage’s Fed funds rate projection unchanged at 4.125 percent throughout the year.
The Fed’s benchmark overnight interest rate is currently in the 4.50 to 4.75 percent range. It has cut rates by 75 basis points this year.
Photo: Reuters
Other global brokerages, including Goldman Sachs Group Inc and JPMorgan Chase & Co, anticipate a 25-basis-point cut from the US central bank next month.
INFLATION RISKS
Nomura expects the Fed to halt its tightening cycle next month after recent hawkish remarks from policymakers amid ongoing economic growth and the likelihood of further elevated inflation, adding to the central bank’s indication that it is not in a hurry to lower rates.
This follows the Fed’s increasing hesitancy to cut rates as a major political shift is under way after Trump’s presidential victory.
Wall Street is trying to reconcile what it sees as further inflationary pressures in the coming year as the US president-elect pushes for tax cuts, higher tariffs and a crackdown on immigration.
“We currently expect tariffs will drive realized inflation higher by the summer, and risks are skewed towards an earlier and more prolonged pause,” Nomura said in a note on Friday.
Traders now see a 34.7 percent chance of the central bank pausing rate cuts next month, according to CME Group Inc’s FedWatch Tool.
FRAGMENTATION
Separately, European Central Bank Governing Council member Joachim Nagel sees the threat of a further fragmentation of the global economy, which could present central banks with new challenges in the form of higher or more volatile inflation.
“The first signs of geoeconomic fragmentation are becoming increasingly evident — and unfortunately, we may be on the brink of significant escalation,” the German central bank chief said yesterday in Tokyo. “This is a concerning development, and we should all strive to restore cooperation and free trade.”
If international tensions should intensify, this could lead to greater inflationary pressures or increased volatility in consumer-price growth and central banks might have to react with higher interest rates, Nagel said.
“We can and will do what is necessary to maintain price stability,” he said.
The Bundesbank president has repeatedly warned the re-election of Trump augurs a protectionist era and threatens to fragment the global economic order.
The Republican has, among others, pledged to impose 60 percent tariffs on China and as much as 20 percent on everyone else, raising fears of full-blown trade wars.
Additional reporting by Bloomberg
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