The note states that after 14 months of holding rates steady, the Fed has cut rates by 50 basis points. This move follows similar actions by the European Central Bank (ECB) and other G10 central banks.
HSBC explains that while inflation remains high, it is on a downward trajectory, and the labor market is showing signs of cooling, which allows for looser monetary policy.
However, the bank points out that despite this current easing phase, uncertainties remain.
Global economic conditions, political developments, and volatile markets could influence future Fed decisions.
One key factor will be the outcome of the upcoming U.S. presidential elections in 2026, which may impact fiscal and monetary policies.
“Many of the potential post-election policy changes, which the candidates have opined on and may hope to implement, could alter the FOMC’s view on the neutral rate and/or how restrictive policy needs to be,” writes the bank.
In their analysis, HSBC presents two potential scenarios. One involves fiscal tightening and further rate cuts, while the other sees supply-side shocks, such as tariffs and immigration policy changes, potentially leading to rate hikes.
They believe the latter scenario could force the Fed to raise rates, whether or not Jerome Powell remains Fed Chair beyond his term, which ends in May 2026.
“Of course, it is also possible that the Fed is already back to raising rates by 2026: not as a consequence of political choices, but quite simply because the economy has rebounded more strongly than expected in response to the monetary easing cycle that is now underway,” states the bank.
However, they also acknowledge that “if it appears that the Fed is behind the curve and a US hard landing occurs in 2025, the Fed would likely still be lowering rates in 2026.”
Source: Economy - investing.com
