Pundits pencil-in rate cut next week as Fed divisions widen on where the cycle should stop

The see-sawing of expectations for what’s to come at next week’s US Federal Reserve interest rate meeting continues, with expectations for a 25 basis point cut now at 89.2%, according to CME’s FedWatch Tool, up from 63% a month ago. This would come on the heels of two 25 bps cuts in September and October, with the latest cut bringing the target range down to 3.75-4% as policymakers grappled with weak labor data and murky economic indicators in the wake of the government shutdown.

This also comes as a lack of consensus among Fed officials deepens. Fed Chair Jerome Powell noted “strongly differing views” within the rate-setting committee over whether to focus on price stability or maximum employment.

Policymakers are also split about what a neutral rate — the level that neither stimulates nor restrains the economy — would be ahead of Fed officials giving their predictions next week, with estimates diverging more than at any point since 2012, Bloomberg reports. Estimations from September put it between 2.6-3.9%, with 19 officials coming up with 11 different predictions.

There’s always some disagreement over where the neutral rate — also known as r-star — is, especially because it can only be inferred and later judged in the rearview mirror, but this time, the degree of disagreement is more intense — and potentially, more consequential. “It starts to become potentially a binding constraint for some of the more hawkish Fed members,” Stephen Stanley, chief US economist for Santander, said. “It definitely means that each successive cut becomes harder and harder.”

AI + tariffs influencing the outlook: Broader AI adoption could lift productivity and push the neutral rate higher, according to Minneapolis Fed President Neel Kashkari. Investment in AI, along with supportive fiscal and monetary policies, were cited as factors helping the global economy cope with US President Donald Trump’s tariff agenda, according to an OECD report cited by Bloomberg. Fed Governor Stephen Miran, on the other hand, maintains that US policies like tariffs and tax cuts may be pushing neutral rates lower, supporting the case for more easing.

Looking ahead: A changing of the guard at the Federal Reserve in 2026 could also reshape views on the neutral rate, with incoming policymakers expected to lean toward lower interest rates — adding another layer of uncertainty to the path of future policy.

Speaking of: US President Donald Trump is set to announce the new Fed Chair early next year, he said last week, and White House economic adviser Kevin Hassett is a top contender. His election would grant Trump a 5-2 majority on the board of the central bank.

MARKETS THIS MORNING-

Asian markets are mostly in the green after Wall Street indices rallied yesterday, with South Korea’s Kospi leading gains with a c.1.1% rise, Japan’s Nikkei climbing more than 0.7%, and China’s CSI 300 adding 0.2%. Hong Kong’s Hang Seng was the only outlier, dipping 0.7%. Over on Wall Street, futures point to another strong open on the heels of the tech-fueled rally.

THE CLOSING BELL: TADAWUL-

The TASI was down 0.1% yesterday on turnover of SAR 3.8 bn. The index is down 12.5% YTD.

In the green: Al Masar Al Shamil (+18.4%), Albabtain (+3.6%) and Acwa Power (+3.3%).

In the red: Herfy Foods (-5.4%), Chubb (-4.7%) and Sidc (-4.6%).

THE CLOSING BELL: NOMU-

The NomuC was down 1.2% yesterday on turnover of SAR 12.5 mn. The index is down 24.64% YTD.

In the green: Almodawat (+7.2%), Wajd Life (+6.0%) and Mufeed (+5.2%).

In the red: Taqat (-10.0%), NBM (-10.0%) and Alfakhera (-9.8%).