The Federal Reserve announced its third rate cut this year, lowering the policy rate by 25 basis points to 3.5%–3.75%, marking a cumulative reduction of 175 basis points since September 2024. Manulife observes that the Fed has pivoted from aggressive easing to a cautious stance, though the medium-term outlook remains dovish, with three rate cuts anticipated in 2026.
The first cut is expected before Chair Powell’s term ends in May, while the latter two are likely in the second half of the year under new leadership, aimed at addressing labor market softness without reigniting inflation. Dominique Lapointe, Senior Global Macro Strategist at Manulife Investment Management’s Multi-Asset Solutions Team, noted that the cut aligns with market expectations amid rising U.S. unemployment and limited data due to a federal government shutdown.
The Fed framed this move as a "risk management" measure, but signals suggest the easing cycle may be nearing its end. Chair Powell described current rates as within a "neutral" range, indicating an end to tightening. The Fed has adopted a "wait-and-see" approach, prioritizing policy flexibility amid mixed signals of labor market weakness and commodity-driven inflation.
Revised projections show stronger 2026 U.S. GDP growth and stable unemployment, though Powell attributed this largely to transitory factors like post-pandemic recovery and AI-driven productivity gains. The FOMC dot plot reveals only 4 of 19 officials foresee rates below 3% in 2026—a 50-bp drop from current levels—suggesting markets expect no more than two cuts next year.
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