December rate cuts unlikely? Nomura: Tariff impact may lead to a significant rise in actual inflation as early as next summer

After Trump won the election, the market has reduced bets on a significant interest rate cut by the Federal Reserve in December. Nomura Securities has become the first major investment bank to predict that the Federal Reserve will not cut interest rates in December.

In its latest research report, Nomura stated that officials have been emphasizing patience, and the economic growth and inflation data are more hawkish than the forecasts from the September Federal Reserve meeting. Therefore, it is expected that the Federal Reserve will pause interest rate cuts in December.

Nomura indicated that the magnitude and timing of interest rate cuts largely depend on the implementation of the Trump administration's tariff policy. It is expected that the tariff policy will be announced shortly after Trump takes office and will push up actual inflation before summer, potentially leading to an earlier and longer pause in interest rate cuts.

December outlook is hawkish, Trump's policies are key factors influencing the future

Nomura stated that the Federal Reserve may end its tightening cycle next month and temporarily hold steady. Previously, Federal Reserve officials had made hawkish remarks, suggesting that with the economy continuing to grow and inflationary pressures possibly increasing, interest rate cuts are not an urgent matter.

Last week, Powell stated in a speech that the recent performance of the U.S. economy has been "quite good," providing the Fed with room for cautious interest rate cuts, and that there is no rush to cut rates. The Fed has time to first understand and assess the economic impact of future policies introduced by Trump before reacting.

Last week's inflation data showed that the U.S. October CPI rose by 2.6%, exceeding the Fed's 2% target and aligning with economists' expectations.

After Trump won the presidential election, the Federal Reserve's stance on interest rate cuts has also become increasingly cautious. As Trump pushes forward with tax cuts and increased tariffs, Wall Street is generally concerned that inflationary pressures will further increase over the next year.

Nomura stated that the magnitude and timing of interest rate cuts largely depend on the implementation of the Trump administration's tariff policy. It is expected that the tariff policy will be announced shortly after Trump takes office and will push up actual inflation before summer, thus narrowing the window for interest rate cuts at the June meeting next year.

Additionally, the tariff policy may also lead the Federal Reserve to pause interest rate cuts earlier and for a longer duration.

Nomura: Interest rate cuts will resume in 2025

Nomura also stated that the recent momentum of U.S. economic growth and loose credit conditions may prompt the Fed to remain patient. Although yields have risen recently, overall financial conditions remain loose, which may raise concerns about accelerating business investment.

While there may not be an interest rate cut in December, Nomura expects that officials may continue to maintain an accommodative stance and resume interest rate cuts in the first half of next year.

It is expected that there will be two cuts of 25 basis points each at the FOMC meetings in March and June 2025, after which there will be a long pause until March 2026. It is anticipated that after the June 2025 meeting, the federal funds rate will reach 4.125%, and after further cuts in the first and second quarters of 2026, it is expected to be 3.625% According to the CME Group's FedWatch tool, traders now believe there is a 34.7% chance that the central bank will pause interest rate cuts in December