Fitch: Expect Less Aggressive Easing Than Prior Cycles
3min read Fitch Ratings has recently provided insights into the anticipated Federal Reserve easing cycle, indicating that the upcoming rate cuts will be both mild and gradual.
After the Federal Reserve's aggressive tightening stance over the past few years, which was primarily aimed at curbing inflation, the shift to an easing cycle is being viewed as a careful transition.
The key message from Fitch is that while the easing cycle is finally on the horizon, the Federal Open Market Committee (FOMC) will proceed with caution, emphasizing a controlled approach to interest rate reductions.
The Slow Pace of the Easing Cycle
Fitch's outlook, as detailed in their latest Global Economic Outlook report, underscores a more restrained approach to monetary policy easing by the Federal Reserve.
The agency expects 25 basis point (bp) cuts in the upcoming September and December meetings, followed by an additional 125 bp in cuts throughout 2025 and another 75 bp in 2026.
This would represent a cumulative 225 bp reduction over the next two and a half years. Compared to previous easing cycles, this trajectory suggests a much slower and more deliberate approach.
Historically, the Federal Reserve has tended to act more decisively during periods of economic slowdown or recession, often implementing aggressive rate cuts to stimulate growth.
However, Fitch's forecast implies that this time will be different.
Rather than a rapid series of cuts to quickly lower borrowing costs, the FOMC is likely to opt for a more measured strategy to avoid reigniting inflationary pressures that have been problematic over recent years.
The Inflation Challenge: A Key Factor in the Fed's Caution
One of the primary reasons for this more restrained approach to easing is the ongoing challenge of reducing services inflation.
While overall inflation has shown signs of moderating, particularly with the easing of supply chain constraints and the stabilization of commodity prices, services inflation has remained sticky.
Services, which account for a significant portion of consumer spending, tend to exhibit more persistent price dynamics compared to goods. High wages in service sectors, along with strong consumer demand, have continued to exert upward pressure on prices.
Fitch's caution regarding the FOMC's easing path reflects a broader concern that too rapid a reduction in rates could undermine recent progress in controlling inflation.
The Federal Reserve is well aware of the lessons from the 1970s and early 1980s, where premature easing led to a resurgence in inflation, requiring even more aggressive tightening measures later on.
To avoid a similar scenario, Fitch expects the Fed to be more conservative, ensuring that inflationary pressures, particularly in the services sector, are sustainably under control before making more significant policy shifts.
Implications for Economic Growth
The anticipated slow pace of rate cuts also has implications for economic growth. Typically, lower interest rates help stimulate borrowing and spending by reducing the cost of loans for consumers and businesses.
This can lead to increased economic activity, potentially providing a boost to growth. However, Fitch's projection that monetary easing "won’t do much to boost growth next year" suggests that the impact of these modest cuts will be limited in the near term.
The cautious approach may be a double-edged sword.
On one hand, it helps prevent a scenario where inflation rebounds and requires further tightening, which could be more disruptive to the economy.
On the other hand, the gradual pace of cuts means that the economy may not receive the level of stimulus needed to significantly accelerate growth, especially if other headwinds—such as geopolitical tensions, slowing global trade, or a cooling housing market—continue to weigh on economic activity.
Market Implications: A New Paradigm for Rate Expectations
For investors and market participants, Fitch's outlook signifies a potential shift in the narrative around the Federal Reserve's policy direction. The days of aggressive easing cycles may be behind us, at least for the foreseeable future. This could lead to a recalibration of expectations for various asset classes, particularly fixed income.
A slow and steady approach to rate cuts may prevent long-term yields from falling too rapidly, which in turn could affect the valuations of interest rate-sensitive sectors such as utilities and real estate.
Furthermore, equity markets, which often react positively to news of rate cuts, may see more muted responses in this environment. Investors may need to adjust their expectations and strategies accordingly, focusing more on fundamentals and less on the potential for aggressive monetary policy support.
Conclusion
Fitch Ratings' projection of a mild and slow Federal Reserve easing cycle represents a cautious approach by the central bank, driven by a desire to avoid repeating the inflationary pitfalls of the past.
While this measured strategy may not provide the immediate boost to growth that more aggressive cuts might deliver, it reflects the Fed's commitment to maintaining long-term price stability.
For markets, this means recalibrating expectations and navigating a landscape where gradualism and prudence take precedence over swift and sweeping policy changes.