The U.S. dollar is likely to stay firm because many traders are now accepting that the Federal Reserve may not cut interest rates soon. Analysts at Macquarie say the market has shifted its expectations. They note that most traders now believe the Fed will keep rates unchanged on December ten. The chances of a cut have fallen below fifty percent, making a pause the new normal outlook.
This change in thinking comes after several Fed officials gave hawkish speeches, which the market has now fully absorbed. The latest economic numbers also back the Fed’s cautious stance. Macquarie points out that estimates from the Dallas Fed show the U.S. economy grew above two percent in the third quarter and into the start of the fourth quarter. A daily inflation gauge called Truflation shows that price pressures remain sticky and are not falling quickly.
Corporate earnings have also been strong. Third quarter results show year over year growth of more than thirteen percent, much higher than the expected eight percent. Macquarie says that when you look at rules based models like the Taylor Rule, they do not show that interest rates are too high. The Cleveland Fed’s estimate for the neutral interest rate is around four point three three percent. That is very close to the current Fed rate, which suggests policy is not overly tight.
Because of this backdrop, Macquarie questions the common belief that the Fed must keep cutting rates. They also say that if this is just a mid cycle adjustment, it will not look like the deeper easing cycles seen during real downturns. They mention past examples from nineteen ninety four and nineteen ninety eight where rate cuts were much smaller.
Macquarie also notes political uncertainty in other countries. One example is Chile’s election, where José Kast seems likely to win. His possible victory points to another shift in Latin America toward pro growth and pro U.S. leadership.