Fed cautious but 25 bps rate cut likely: Analysts

Based on recent data, the Fed is projected to cut interest rates twice more in 2024, leading to a 50-bps rate cut, if economic data remains unaltered or changes slightly.

Analyst expectations on Fed interest rate:

Saad Al-Thaqfan, a board member of the Saudi Economic Association

Saad Al-Thaqfan, a board member of the Saudi Economic Association, expect the US Federal Reserve to cut interest rates by 25 bps based on recent economic data.

Mohamed Abu Basha, Head of Macroeconomic Analysis at EFG-Hermes, said that the 25-bps rate is expected, despite the weakness of the recent employment data, which may have been affected by the recent hurricane in Florida.

There may be more interest rate cuts; however, the election results will cast a shadow over these uncertain expectations regarding the easing cycle.

Mohamed Farag, Head of Asset Management at Arbah Capital, believes that the Federal Reserve may prefer to move cautiously regarding cutting interest rates by 25 bps at the next meeting, given the crucial role that economic data plays in its decision.

Once the data shows that inflation continues to slow and the unemployment rate declines, there may be a tendency toward fixing interest rates or even reducing them slightly.

Factors that may affect interest rate decision:

Al-Thaqfan explained that the US Fed focuses on economic performance besides the inflation indicators and the extent of control over them. Thus, higher inflation may halt interest rate reduction until the circumstances become clear.

He added that the remainder of 2024 is expected to witness a reduction by 50 basis points based on the latest data and the stable economic data.

Mohamed Abu Basha, Head of Macroeconomic Analysis at EFG-Hermes

Abu Basha stated that other data and election results will encourage the US Fed to continue its path of monetary easing.

He sees that the economic uncertainty to clearly increase in 2025 and impact the future of the easing cycle.

Farag said that geopolitical events and changes in oil and other commodity markets can significantly impact inflation expectations and economic growth, and thus affect the Fed's decisions.

He pointed out that the statements of Fed officials play a crucial role in directing market expectations in general, as they indicate a change in the Fed's stance on monetary policy and could lead to volatility in financial markets.

Abu Basha stated that Trump's decisive victory will heighten uncertainty, driven by concerns over potential tariff impositions, which could lead to rising inflation and disrupt the ongoing easing cycle.

He explained that markets will remain in a "wait-and-see" mode until Trump assumes office and assembles his team. During this period, uncertainty and volatility are expected to dominate.

Abu Basha also highlighted that, overall, macroeconomic fundamentals suggest a noticeable slowdown in economic growth as the stimulus measures introduced during the COVID-19 pandemic lose their effectiveness.

Furthermore, the impact of the high interest rates over the past two years is gradually becoming more apparent in the economy.

Economic performance after Federal Reserve's decision:

Mohamed Farag, Head of Asset Management at Arbah Capital

Farag added that if economic data reveals a strong recovery in the US economy and inflation begins to rise again, the Federal Reserve is likely to halt its interest rate cuts.

He suggested that the Fed may then begin to raise rates gradually to manage inflation. If inflation exceeds the Fed's target, it will signal the need for a tighter monetary policy.

He noted that if inflationary pressures from factors like rising energy prices or supply shortages intensify, the Fed may be forced to adopt stricter measures.

He also stated that faster-than-expected US economic growth could heighten inflation concerns, leading the Fed to raise interest rates.

Monetary Policies:

Farag said that if the US economy continues to grow slowly, further monetary easing, including rate cuts, may be necessary to support economic activity.

He added that a sharp rise in unemployment could signal weakening demand, requiring additional stimulus through lower rates.

Farag noted that continued labor market gains and rising wages may point to economic recovery. If inflation continues to decline, it may reflect the success of current policies in controlling price pressures.