Following the US Federal Reserve’s 25-basis-point rate cut in October, Franklin Templeton Fixed Income chief investment officer Sonal Desai suggests this may be the last cut of the current easing cycle. Desai believes the focus on December served to distract from the fact that current economic conditions and outlook did not fully warrant the October reduction. It also aimed to temper market expectations, which had anticipated the Fed funds rate falling to 3 per cent by mid-next year, an additional easing Desai deems unjustified by current data.
Desai pointed to robust growth and labour markets as key factors influencing her assessment. She highlighted GDP expansion fuelled by investment in artificial intelligence and strong household consumption. The unemployment rate remains near full-employment levels. She also noted upcoming fiscal stimulus expected in 2026. Furthermore, the Fed’s balance sheet strategy, which involves halting quantitative tightening but maintaining its size through reinvestments, plays a role.
According to Desai, the current economic outlook does not justify additional monetary easing. Fiscal dominance has emerged as a significant factor influencing monetary policy. She remains neutral on duration and suggests that loans, in particular, would benefit from a reduction in Fed rate-cut expectations. Desai anticipates that the outcome of the recent Fed meeting is consistent with the US dollar remaining range-bound in the near term.
