USD: Pause in rate cuts may come as early as January - OCBC

FOMC decision to cut the target range of the Fed funds rate by 25bps to 4.25-4.50% was not unanimous, with one member voting for a hold, OCBC's FX analysts Frances Cheung and Christopher Wong note.

Inflation expected to move to the 2% target in 2026/2027

"Meanwhile, the o/n reverse repo rate has been cut by 30bps as we expected, to align with the lower bound of the Fed funds rate target range. The Fed revised upward 2025 PCE inflation forecast to 2.5% from 2.1% prior, and 2025 core PCE inflation forecast to 2.5% from 2.2% prior."

"Inflation is now expected to move nearer or to the 2% target in 2026/2027, which explains the more paced out rate cut cycle the updated dot-plot reflect. On the dot-plot, the median dots reflect 50bps of cuts in 2025, followed by 50bps of cuts in 2026, and a 25bp cut in 2027. Powell commented that the policy stance 'is now significantly less restrictive. We therefore can be more cautious as we consider further adjustments to our policy rate'."

"A pause in rate cuts may come as early as January, but between now and January FOMC meeting there are still data to be digested. Granted, these dots move, and past December median dots were not particularly accurate in anticipating the actual outcome."