Rhythmic Reasoning_Full Report_Final_EN - Flipbook - Page 23
THE DRUMMER'S EAR | RHYTHMIC REASONING
Fig. 2: Domestic demand conditions have been soft this year
12%
to continue to ease policy settings for the balance of this year and
next, bringing the upper bound of the Fed funds rate to 3% by
2026-end.
Fig. 3: The median projection from the FOMC now forecasts
more policy rate cuts relative to the previous meeting
8%
4%
3.9%
3.6%
3.6%
3.4%
3.4%
3.1%
0%
4Q20
3Q21
2Q22
1Q23
Final sales to domestic purchasers
4Q23
3Q24
2Q25
Avg since 2010
Source: Bureau of Economic Analysis, Bloomberg
Finance LP, Scotia Wealth Management
2025
FED RESUMES POLICY RATE CUTS AS LABOUR MARKET
CONDITIONS DETERIORATED
2026
June forecast
2027
September forecast
Source: U.S. Federal Reserve, Scotia Wealth Management
One could possibly look past the last couple of GDP prints by
pointing to trade-related distortions and the impact they have had
on consumption and investment patterns. What is tougher to fade
however is the recent softness in the labour market. U.S. non-farm
payrolls have increased by an average of 75k this year through
August, with readings between May to August averaging a meagre
27k.
Negative revisions have also been a talking point. The Bureau
of Labor Statistics’ annual benchmarking revisions revealed a
negative revision of -911k for the period spanning April 2024 to
March 2025, the biggest annual downward revision to nonfarm
payrolls on record. These revisions cut the average monthly pace of
nonfarm payrolls in half to about 75k for the period, suggesting that
the U.S. labour market was not as healthy as it was once thought
to be.
While softening trend employment growth reflect cooler labour
demand, supply-side factors are also at play. Factors such as tight
immigration policy have reduced the pool of available workers.
With slower labour supply growth, the nonfarm payroll breakeven
rate is likely lower now, suggesting that even modest job gains could
stabilize the unemployment rate.
The latest soft patch of labour market data was the driving
force behind the U.S. Federal Reserve (Fed) resuming its rate
cutting cycle in September after last cutting in December 2024. All
members voted in favour of a quarter point cut at that meeting
except for new Governor Stephen Miran who preferred a half point
reduction.
With respect to growth, the median real GDP growth forecast for
this year was revised up two tenths for this year and next to
1.6% and 1.8%, respectively, and one tenth for 2027 to 1.9%. The
unemployment rate forecast remained unchanged for this year
(4.5%) and was revised lower by a tenth for each of the following
two years to 4.4% and 4.3%, respectively (notable given that
downside risks to the employment side of the Fed’s dual mandate
was flagged as the driving force behind the cut decision).
TARIFFS HAVEN’T MATERIALLY RAISED INFLATION, BUT
UNDERLYING PRICE PRESSURES HAVE YET TO ABATE
Finally, the core PCE inflation forecast was unchanged for this year
(3.1%) but was revised higher to 2.6% for 2026 from 2.4%. Fed Chair
Jerome Powell’s comments at the September Fed meeting and
at the Jackson Hole Symposium in August seemed to somewhat
downplay the impact of tariffs. At the latter event, the Chair said
that a “reasonable base case is that the [tariff] effects will be
relatively short lived – a one-time shift in the price level.”
Consumers and businesses appear more concerned, however.
Sentiment indicators, such as S&P Global’s Purchasing Managers’
Index and the Institute for Supply Management’s monthly survey,
suggest rising input costs as businesses continue to grapple with
tariffs. U.S. consumers’ inflation expectations for the next 12
months are also elevated, particularly when compared to other
developed countries (Fig. 4).
The Fed also released its quarterly Summary of Economic
Projections at this meeting. The median projection sees two
more quarter point cuts in 2025, though there was considerable
dispersion among individual estimates. Nine members of the
Federal Open Market Committee (FOMC) forecasted 1 or fewer cuts
for the calendar year, nine pencilled in 50 bps, and one (likely Miran)
favoured 125 bps of additional cuts. On balance, the forecasts were
more dovish across the forecast horizon (Fig. 3). We expect the Fed
23 of 62
