RBC says Fed rate cut will come from weakness, not strength

Today’s decision by the Federal Reserve to hold steady on interest rate hikes was widely expected, but the decision to start cutting rates is more difficult.

Or is it? RBC economist Claire Fan says the coming macro environment may actually force the Feds hand.

While Fed chairman Powell said that “no one is declaring victory” over inflation yet, he did say internal discussions on cuts have already happened.

In a research report on the afternoon of December 13, Fan zeroed in on exactly why she thinks those cuts are coming, and it’s not because she believes things are going to come up roses.

“Alongside the decision to hold rates steady was the revised SEP that showed a more aggressive easing path in the years ahead with the timing of interest rate cuts now a topic of discussion,” she wrote. “The unusually wide dispersion in expected median Fed Funds in 2024 however again highlighted the level of uncertainty associated with the outlook for both the economy and the inflation in the year head. Persistently lower CPI readings in the U.S. are helping calm the Fed’s concerns that still-resilient economic backdrop will cause another flareup in future inflation. We expect the Fed to be content with where interest rates are currently at, before a gradually deteriorating backdrop prompts them to pivot to rate cuts sometime around the middle of next year.”

The potential for a gradually deteriorating backdrop however didn’t seem to spook investors at all today. They cheered the Dow Jones to an all-time high, as the index closed above 37,000 for the first time ever.