The Fed kicked off the long-awaited rate-cut party earlier this week, triggering a wave of bets on more easing ahead. But analysts at MRB Partners warn the central bank is likely to squeeze out no more than one, or possibly two cuts this year before hitting pause, as the labor market is proving tougher than feared and inflation remains stubbornly above target.
“The bond market sees the Fed cutting the policy rate two more times this year and providing between two to three additional cuts next year,” the analysts said. However, "the Fed will likely cut the policy rate one more time this year, and possibly twice. We do not see the rate-easing cycle continuing beyond this year.”
The Fed’s own projections call for two more cuts this year, and more cut in 2026.
Despite the recent jobs slowdown, MRB Partners highlights that the labor market is not entering a self-reinforcing slump and that the Fed’s labor market mandate is focused on maximum employment, not specific job creation rates. Slower jobs growth is partly driven by restrictive immigration policy, which has reduced labor force growth sharply this year.
Having a slower growth rate in the labor market, means that "maximum employment can be maintained with much slower job creation than last year," the analysts added.
The climb in the unemployment rate in August, helped echo the narrative of weakening labor market and spur bets on rate cuts, but MRB said that the tick higher was "not due to layoffs, which remain benign," pointing to Thursday’s soft jobless claims as evidence.
At the same time, inflation pressures remain sticky, particularly from tariffs and non-tariffed services excluding rent, meaning the Fed’s window to ease further is narrowing. Economic growth is expected to firm next year and the unemployment rate will stay low, limiting need for further cuts, the analysts said.
The Fed’s summary of economic projections, released earlier this week following the rate cut decision, adds credence to this view.
Fed members see the unemployment rate declining slightly to 4.4% in 2026, down from a prior estimate in June of 4.5% previously. The downtick in unemployment is expected continue to 2027, with members forecasting a 4.3% unemployment that was down from a prior estimate of 4.4%.
For 2026, economic growth is seen rising to 1.8%, up from a prior estimate of 1.6%, and to 1.9% in 2027, up from a prior estimate of 1.8%.
The analysts caution that the bond market’s dovish expectations of multiple cuts next year are unrealistic and investors should beware of being disappointed.
"As the upward pressure on inflation mounts ahead, the window of opportunity to ease further will be shorter than the bond market, (and the Fed) believes," MRB said.
Source :
https://www.investing.com/news/economy-news/as-bets-on-big-fed-rate-cuts-rise-mrb-warns-easing-cycle-wont-go-beyond-2025-4247418
