Fidelity: Fed divided as new dovish Chair starts to come in focus
Max Stainton, Senior Global Macro Strategist at Fidelity International, comments on the results of the Fed meeting.
'The US Federal Reserve cut rates by 25 basis points (bps) as expected, taking the Fed funds target range down to 3.5-3.75 per cent. However, the accompanying statement, which removed the forward guidance on additional cuts, alongside two hawkish dissents, gave this cut a hawkish flavour.
However, the reintroduction of quantitative easing (QE) targeting $40bn bill purchases a month, alongside a set of dots which retained a cut next year and the year after, suggests there is still a large bulk of the FOMC who see interest rates as being able to fall further before hitting a neutral resting point.
Looking ahead, we expect the market path of interest rates to be increasingly determined by speculation surrounding President Trump’s pick to be the new Chair, rather than the incoming data. In our base case scenario for 2026, we expect a non-traditional dovish Fed Chair to be appointed by the Trump administration, whose main objective is to lower interest rates further.
This dynamic is likely to make the forward interest rate curve increasingly kinked around when the new Fed Chair will start in May 2026, with a new rate-cutting cycle getting priced in if this base case scenario comes through.
While such a scenario has started to get priced by markets, there is potential for this to extend at both the front and back end of the curves, with a non-traditional dove as Chair an underappreciated risk to the back end.'