📝Fed Economic Outlook Faces Stagflation: Rabobank

We expect the FOMC to reduce the target range by 25bp from 4.25-4.50% to 4.00-4.25% at the meeting on September 16-17. This is fully priced in by the market with a small residual probability of a 50bp move. Analysts surveyed by Bloomberg are split 55/9 in favour of a 25bp cut, with the remaining nine expecting a “no-change” decision.

Inflationary pressures are picking up again, as seen in yesterday’s CPI inflation report with

core CPI inflation more than 1ppt away from target at 3.1% y/y, while the headline print is

knocking on the door of 3% at 2.9% y/y. The current monthly pace of inflation is certainly not

conducive to the 2% target at 0.4% and 0.3% m/m respectively.

On the labor side of the Bank’s mandate, the data are noisy, but the direction is clear – the labor market is loosening. Given the lagging nature of labor data, there are fears that the

worst is yet to come and we could see a marked slowdown in consumption.

The Fed is in a difficult position as it faces an economic outlook with hints of stagflation.

That said, Powell clearly opened the door to a 25bp cut at the Jackson Hole meeting, and we

know at least two voters are keen to cut rates given their dissents in July. That could rise to

three if Stephen Miran is confirmed by that juncture, which we expect he will be.

Looking further out, Trump’s influence on the Fed is likely to increase as the number of

Trump-loyalists on the Board rises, particularly IF, Lisa Cook is forced to resign.

The market is currently pricing in 150bp of cuts by the end of 2026 (equivalent to six 25bp

cuts) while we are forecasting 125bp. - Rabobank