Monetary Policy & Inflation | US
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Summary
- Following below-expectations CPI and above-expectations jobless claims, I now expect next week’s 2025 and 2026 dots to show two cuts each, from one and three cuts in my Fed preview.
- It is too early for the FOMC to form a view on the impact on the outlook of Israel’s most recent attack on Iran.
Market Implications
- I still expect two-three cuts in 2025 starting at September’s FOMC, against markets pricing 2.2.
Now Calling for Unchanged SEP dots
Since I published my Fed preview on 11 June, two data prints show the ongoing disinflation and economic slowdown are happening faster than I expected. As I explained in my CPI review, the direct impact of tariffs has been limited and there is no sign of above trend increase in the prices of non-tariffed goods or of services. Inflation continues surprising on the downside (Chart 1).
Also, yesterday’s jobless claims were above expectations and have started an upward trend, aligning with the early signs of labour softening I highlighted in my NFP review (Chart 2).
Currently the FOMC is likely to view Israel’s most recent attacks on Iran as adding to already high uncertainty rather than tweaking the macroeconomic outlook in a specific direction. This is because the impact of the Israel-Iran conflict on oil supply is unclear.
Therefore, I am now calling for an unchanged dot plot with 2025 and 2026 dots showing two cuts each, from one cut in 2025 and three cuts in 2026 in my Fed preview (Table 1).
I still expect two-three cuts in 2025 as the data so far validates my expectations of a marked growth slowdown and no second-round effects from tariffs.
Table 1: Now Calling for 2025 Dot Showing Two Cuts
(Forecast June SEP, March SEP in Brackets)
| Chart 1: Negative Inflation Surprises | Chart 2: Rising Jobless Claims |
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Market Consequences
I still expect two-three cuts in 2025 starting at September’s FOMC, against markets pricing 2.2.
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