Fed unlikely to commit beyond initial 25bp rate cut in September: HSBC By Investing.com

Investing.com — The Federal Reserve is expected to initiate its first rate cut in over a year at its September meeting, but HSBC analysts said in a note on Thursday that they believed the central bank would proceed cautiously without a commitment firm for further reductions in the near term.

HSBC anticipates a 25 basis point (bp) cut in the federal funds target range, lowering it from 5.25%-5.50% to 5.00%-5.25%.

“We expect the FOMC’s median projection for the federal funds target range at the end of 2024 to decline to 4.50-4.75% (from 5.00-5.25% previously), in line with our cut forecast of the rate of 25 bp in September, November and December,” wrote HSBC.

However, they also said the Federal Open Market Committee (FOMC) was unlikely to commit beyond the initial 25bp cut at this stage.

The firm explained that while recent inflation data was slightly higher than expected, the broader economic outlook supports the case for a gradual approach.

“The latest inflation data came in slightly higher than we anticipated, giving FOMC policymakers another reason to start with a smaller initial rate cut of 25 basis points rather than a more higher than 50 basis points,” HSBC said.

In addition, the bank does not expect any significant revisions to the Fed’s economic forecasts in the next quarterly report.

They explained that they expect the FOMC’s median end-2024 projection for the federal funds rate to fall to 4.50%-4.75%, consistent with their forecast of incremental rate cuts.

Fed Chairman Jerome Powell is expected to strike a cautious tone in his press conference, saying future policy decisions will be made “meeting by meeting” while monitoring economic data.

HSBC also expects Powell to highlight the Fed’s dual mandate of reducing inflation to 2% while maintaining a strong labor market.