Live Markets: Has Fed rate pricing gone too dovish?

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09/10/2025 09:38

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HAS FED RATE PRICING GONE TOO DOVISH?

The projected easing trajectory for the Federal Reserve is prompting fresh scrutiny in markets, with some participants cautioning that pricing may be leaning too far into dovish territory.

“Some (FOMC) participants argued that underlying inflation was close to the 2% target, while others expressed concerns that progress had stalled with inflation above the target,” Barclays economists say, pointing to divisions at the last Fed meeting.

“The (Fed) minutes do highlight the fact that perhaps just one bad inflation print would be enough to see the FOMC change tack and quickly decide to hold off cutting,” says Derek Halpenny, head of research global markets at MUFG.

Barclays analysts also note that the September Summary of Economic Projections (SEP) showed a majority of policymakers pencilling in one or more easing moves this year, while a significant minority — 7 out of 19 — preferred to keep rates unchanged.

Barclays maintains its expectation that the FOMC will deliver two more 25-basis-point cuts in 2025 while arguing that any Fed moves “in 2026 will largely depend on a sustained softening in monthly inflation prints.”

Markets are pricing in roughly a 90% chance of two Fed cuts by year-end, and a total of 110 basis points by the end of 2026.

Some economists say that while labour market data may justify that much of a decline in rates, broader economic indicators do not. Furthermore, the rally in equities makes it difficult to describe the current U.S. monetary policy as restrictive.

(Stefano Rebaudo)

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