Schroders Global investment economist George Brown wrote that due to the uncertainty surrounding the "neutral" interest rate level, there is a concern that a radical rate-cutting cycle could reignite inflation risks. Schroders Global Investment pointed out that Powell acknowledged that there is more uncertainty surrounding the neutral interest rate compared to the past, and he mentioned twice during the press conference that the committee will "get answers through its actions." In other words, they are unsure of the extent to which monetary policy will be eased and will rely on data to determine when the neutral interest rate is reached. Schroders Global Investment's main points are as follows: When the Federal Reserve starts a rate-cutting cycle with a 0.5% reduction, it usually attracts attention from the investment markets. The US central bank has previously implemented similar rate cuts in January 2001 and September 2007 (3 to 4 months before the US economy entered recession), as well as at the beginning of the global pandemic in March 2020. Due to the surface phenomena of this action, Schroders Global Investment had assumed that the Fed would follow the mid-term adjustment practices of 1995, 1998, and 2019. In the three previous adjustments, a slowdown in economic growth (rather than recession) prompted the Fed to start rate cuts with the usual 0.25% reduction. However, the Federal Open Market Committee (FOMC) opted for a more aggressive 0.5% reduction, matching the expectations of 91 out of 100 economists surveyed by Schroders Global Investment and market media. Fed Chairman Powell tried to position this as a "re-calibration" in the press conference, mentioning this point nine times and emphasizing that the impact of monetary policy has long and variable lag times. This implies that for the current stage of the economic cycle, interest rates are overly tight, and the Fed wants to return to the neutral interest rate as soon as possible. Although Powell's logic can be understood, such an aggressive pace of monetary easing is unnecessary. Neutral is an imprecise concept, it is not a measurable figure but a theoretical interest rate level that is neither too tight nor too loose to bring economic growth and inflation back to a stable and predictable path. However, if a radical rate-cutting cycle occurs and the US economy proves to be more resilient than Fed policymakers expected, US monetary policy may end up being too loose or lower than the neutral level, reigniting inflation risks. Expected rate cuts of 0.25% in November and December, not necessarily another 1% cut next year Fed Governor Bowman seems to share the same concerns, as she supported a 0.25% rate cut at the September meeting. She believes that the US labor market is still close to full employment, even though recent signs of weakness have been observed due to data calculation and immigration issues. Despite inflation easing significantly, she believes it is premature to declare victory, so it is best to proceed at an appropriate pace to avoid unnecessarily stimulating demand. However, Bowman appears to be in the minority. The members of the FOMC have a "dot plot" forecast for the end of 2024 interest rates, showing a further 0.5% rate cut on top of the current 4.75%-5.00% federal funds rate range by the end of the year. Although this may be a bit excessive, it is best not to contradict the Fed. Therefore, it is currently expected that the Fed will cut rates by 0.25% in November and December, rather than just in December as previously expected. Added to the significant rate cut in September, this is an additional 0.5% cut compared to Schroders Global Investment's previous expectations, leading to an upward revision of the growth forecast for 2025 from 2.1% above consensus. However, Schroders Global Investment doubts that the Fed will follow the dot plot and make another 1% rate cut in 2025. This trajectory is unlikely to happen due to the wide range of forecasts from the 19 FOMC members and the significant uncertainty regarding the neutral interest rate. The committee's estimate of the neutral interest rate can be inferred from the median of the member's "long-term" dot plot, currently around 2.875%, about 2% below the current range. However, this inferred neutral interest rate has been adjusted upward at each meeting in 2024, hovering around 2.5% for much of the time from 2019 to 2023. Therefore, if the US economy presents a more optimistic outlook, it is reasonable to assume that the median point will be further increased. There is more uncertainty surrounding the neutral interest rate, and the risk of underestimating it is greater than overestimating it. To clarify the issue, if we infer the trajectory of the median long-term point since the end of 2023, the neutral interest rate will reach 3.5% in a year, roughly in line with Schroders Global Investment's estimate of the neutral interest rate. Nonetheless, the uncertainty surrounding the position of the neutral interest rate is more important. As mentioned earlier, empirical estimates of neutral differ widely, with one committee member estimating rates as low as 2.375% and another as high as 3.75%. This is in stark contrast to the sharp divergence between committee members during the last mid-term adjustment in 2019. At that time, half of the members' dot plots implied a neutral interest rate of 2.5%, with only two members believing it to be above 3%. Powell acknowledged that there is more uncertainty surrounding the neutral interest rate compared to the past, and he mentioned twice during the press conference that the committee will "get answers through its actions." In other words, they are unsure of the extent to which monetary policy will be eased and will rely on data to determine when the neutral interest rate is reached. In the view of Schroders Global Investment, the risk of underestimating the neutral interest rate is greater than overestimating it. This calls for a more cautious pace of easing than what is currently expected from the dot plot. Therefore, it is still expected that the committee will cut rates by 0.25% in March and June 2025, and then pause the rate-cutting pace to evaluate the effectiveness of the already implemented easing policy (cumulative 1.5% rate cuts). If inflation continues to be under control, this should open the door for further moderate easing in 2026. However, Schroders Global Investment doubts that the Fed will follow the dot plot and make another 1% rate cut in 2025. This trajectory is unlikely to happen due to the wide range of forecasts from the 19 FOMC members and the significant uncertainty regarding the position of the neutral interest rate. The committee's estimate of the neutral interest rate can be inferred from the median of the member's "long-term" dot plot, currently around 2.875%, about 2% below the current range. However, this inferred neutral interest rate has been adjusted upward at each meeting in 2024, hovering around 2.5% for much of the time from 2019 to 2023. Therefore, if the US economy presents a more optimistic outlook, it is reasonable to assume that the median point will be further increased.The risk of global investment in interest rate forecasts is clearly downward. It is still unclear whether the investment market prompted the Federal Reserve to cut interest rates by 0.5% in September, but even if so, the committee should not turn this into a habit. Schroders' latest global investment forecast includes a "aggressive rate cut" scenario: in this case, concerns about the outlook for economic growth convince the committee to implement the market's expected aggressive rate cut. This will ultimately lead to a re-acceleration of inflation and force the committee to start raising rates again.Bonjour! Comment a va aujourd'hui?