In its latest weekly key insights, Nomura revised its expectations regarding interest rates, stating that it now expects the Federal Reserve to hold off on cutting rates in December. The company added that it now also expects the Fed to cut rates twice in the first half of 2025.
“Recent Fedspeak has been hawkish, while growth and inflation have clearly exceeded the September SEP estimates,” added Nomura. Inflation data was mixed this week. Last week, data showed that U.S. consumer prices rose 2.6 percent in the 12 months through October, above the Fed’s 2 percent goal but in line with economists’ expectations. Core CPI was more muted than expected, but relevant details of PPI were surprisingly strong. Nomura expects core PCE to rise 0.292 percent.
The report also highlighted retail sales, which implied strong consumer momentum, while industrial production declined due to temporary weather effects and strikes.
According to the CME FedWatch tool, traders currently expect a 35 percent chance of the Fed holding interest rates in December. Meanwhile, other global brokerages, including Goldman Sachs and J.P.Morgan, anticipate a 25 bps cut from the central bank next month.
Trump’s presidential victory raises inflation concerns
This update to forecasts follows the Fed’s increasing hesitancy to cut interest rates as a major political shift is underway after Trump’s presidential victory.
“President-elect Trump has begun to nominate cabinet officials and advisors. His selections so far have focused on loyalists, rather than traditional conservatives or business leaders. On the margin, this raises the risk of aggressive executive action early in the new administration, including the possibility of a rapid ramp-up in tariffs,” the note added.
Tariffs and tax policy will be the focus of economic policy early in the second Trump administration.​​​​ The company added that it expects tariff-driven inflation by mid-2025 will lead to a prolonged pause in the Fed’s interest rate easing cycle. “The labor market is slowing, and risks remain skewed to the downside. Gradual cooling is more likely than a sharp deterioration,” added Nomura.
Read: Fed’s Powell says no need to hurry in lowering interest rates amid stronger U.S. economy
Global central banks to cut rates
Nomura expects the Bank of Japan to make an additional rate hike in December 2024, followed by two hikes in 2025. Japan’s economy has been and will continue to be on a recovery path, exceeding potential, since Q2 2024.
Meanwhile, it expects the Bank of Korea to cut interest rates by only 50 basis points by the end of 2025 due to renewed FX market concerns despite slowing growth. In India, the central bank will likely cut rates by 100 basis points starting in February 2025 amid softening growth and lower inflation.
“With weaker growth and inflation, we expect 25bp cuts at each ECB meeting until mid-2025 and a final cut in September to 1.75 percent,” it added.
Nomura also expects Australia to cut rates starting February 2025 and New Zealand to initiate an aggressive rate-cut cycle. As for Canada, the company expects the central bank to deliver a 50 basis point cut in December, followed by three consecutive 25bp cuts through April 2025.
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