Despite the Fed staying in pause mode to start the year, market expectations are still leaning towards more rate cuts down the road. And that is reflected by the pricing in Fed funds futures as well. Currently, we’re still seeing traders price in ~57 bps of rate cuts by year-end. The recent solid US economic data has only served to push back the timing of the first 25 bps rate cut from June to July. However, that is very much just a switch back to where we were at the start of the year in some sense.

As we gear towards the middle of the year, a hot topic with regards to the Fed is about Powell’s departure. It’s unclear if Trump will get his way in placing Warsh in the position of the Fed chair with a blockade at the Senate still in play. But once he does get his way, it is more than likely to see more dovish influence at the central bank.

That being said, ANZ is viewing that a softer inflation profile will be more than enough to seal the deal for more rate cuts this year. Despite Trump’s tariffs, US inflation hasn’t really been running hot and there are nascent signs of it even cooling as we get into the turn of the year. ANZ argues that as that trend persists, it will eventually force the Fed’s hands to ease monetary policy further in the months ahead.

The firm notes that:

“We now expect the Federal Open Market Committee (FOMC) will resume interest rate cuts in Q2, probably in June, as it appears to have little appetite to cut at the March meeting. This change in view reflects the persistent guidance from many FOMC members that the committee can afford to be patient, awaiting confirmation that Personal Consumption Expenditure (PCE) inflation is slowing from its current 2.8% y/y.

Owing to an extended pause in the rate cutting cycle, which we expect will increase disinflationary pressures, we are adding an additional 25bp rate cut to our forecast profile. We now forecast three 25 bps rate cuts this year – one each in Q2, Q3 and Q4 – to leave the federal funds target range at 2.75–3.00%.”