LIVE MARKETS-Bets are on for rate cuts but dot plot may lag

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BETS ARE ON FOR RATE CUTS BUT DOT PLOT MAY LAG

Since data showed jobless claims jumping last week, traders have been confidently betting that the Federal Reserve will cut interest rates three times by year-end, for one 25 basis point cut at each of the remaining three policy meetings.

Morgan Stanley's chief U.S. economist Michael Gapen said he expects the FOMC to lower the target range by 25bp to the 4.0-4.25% range without changing balance sheet policies at its meeting, which starts Tuesday and ends on Wednesday this week.

President Donald Trump's economic adviser Stephen Miran is expected to be confirmed and sworn in on time to be seated at the Federal Reserve's policy-setting table in time to vote on interest rate policy at this week's meeting. As a result, Gapen expects one dissenting vote, from Miran, in favor of a 50 bp cut at the meeting this week.

Ultimately Gapen expects "data in real time to move the Fed to cut consecutively through January." But for now, Gapen sees the median dot still showing just two cuts this year.

"To get to three cuts would require about eight FOMC members shifting their expectations. If Chair Powell himself moves, it would be possible, but we still think a two-cut median is
more likely," Gapen said. For 2026, he expects "the median dot to show two rate cuts versus one previously."

The economist said that he expects Wednesday's statement to repeat the view that there are "risks to both sides of its mandate and that uncertainty remains elevated." But due to weakness in the last two employment reports, Gapen is expecting new language pointing to rising downside risks to employment.

And he sees policy guidance suggesting "a new easing bias" as the FOMC considers the extent and timing of more rate cuts.

Gapen said the Fed's prior statement did not show a clear policy bias, choosing instead to frame changes as "adjustments" to the funds rate.

(Sinéad Carew)

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