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The Macro Brief – US rate cuts & spending gluts
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Ahead of the Federal Reserve’s September meeting, US economist Ryan Wang assesses the potential pace of interest rate cuts and the implications of the growing US deficit.
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Transcript
Introduction to Macrobrief Podcast
00:00:01
Speaker
Welcome to HSBC Global Viewpoint, the podcast series that brings together business leaders and industry experts to explore the latest global insights, trends, and opportunities.
00:00:13
Speaker
Make sure you're subscribed to stay up to date with new episodes. Thanks for listening, and now onto today's show.
00:00:24
Speaker
You're listening to The Macrobrief, the podcast that looks at the issues driving financial markets across the globe. This episode was recorded for publication on the 11th of September, 2025 by HSBC Global Investment Research.
00:00:36
Speaker
All the disclosures and disclaimers associated with it must be viewed on the link attached to your media player. And remember to like and subscribe to The Macrobrief wherever you get your podcasts.
Federal Reserve's Rate Cut Decision
00:00:50
Speaker
Hello, I'm Aline Van Dyne and welcome to the Macro Brief. This week we're back in our New York studio and we're talking about the outlook for the US specifically on the policy front.
00:01:04
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We're expecting 25 basis point rate cut next week from the Federal Reserve after its 16th to 17th of September meeting. This will be the first one this year.
00:01:16
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And we're also looking at the tensions in the US economy, what to expect going forward, Fed independence, and also the US deficit.
00:01:26
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So lots to cover. And to shed light on this and give us some context on what to expect. I'm joined in the studio by Ryan Wang, a US economist.
00:01:38
Speaker
Ryan, good to have you back on the podcast. Ryan Wang Aline. Thanks for having me back. Ryan, let's kick off with expectations for the f FOMC and ah rate cuts.
00:01:49
Speaker
I think a 25 base point rate cut at the September Fed meeting is what we will see. As you noted, we have not had any rate changes since the beginning of this year, but I think that 25 base point reduction, i think the policymakers will coalesce around that.
00:02:05
Speaker
There are risks in both directions. We've continued to see data that show elevated inflation and also some increasing risks on the job side. and it's that second part I think that will lead the policymakers to at least deliver that twenty five basis points.
00:02:20
Speaker
What is the market pricing in? With the latest jobs data and really this goes back to the past month or two the July jobs report released in August and the August jobs report that we just saw recently both showed signs of softness and especially after that latest report um the the the markets are closer to pricing in consecutive rate cuts at the three remaining meetings this year which are in September but then also October and December.
00:02:45
Speaker
And so I think that's going to be really the pinch point for markets, you know, whether we get that consecutive rate cut coming in October. ah Clearly we do agree with this assessment that markets have adopted that the labor market data do, well they certainly support some easing and and and the risk to our view for this year could be that delivery of consecutive rather than slower rate cuts.
Debate on Future Monetary Policy
00:03:10
Speaker
Now, there might be quite a lot of agreement about a 25 basis point cut next week, but there doesn't seem to be as much agreement about what happens next and how many rate cuts follow and um for how long.
00:03:25
Speaker
So, what are your expectations around that and what will the FOMC indicate in its projections? Yeah, I think that's absolutely right. and And really what it comes down to is this tension between the two sides of the f FOMC's dual mandate, which are inflation and employment.
00:03:45
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The latest set of August inflation numbers show essentially that inflation is running very close to 3% no matter what measure you look at. And of course, that is well above the f FOMC's 2% inflation target.
00:03:57
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But again, that need now needs to be balanced by the signs that labor market conditions are softening. We're seeing clear evidence of slower hiring. And even the latest reading on initial jobless claims, which which is a relevant metric that shows the pace of layoffs,
00:04:16
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actually increased in the latest week. So that adds to the complication. We, for our part, have been expecting gradual rate cuts from the Fed, you know, starting with 25 base points in September, but then only another reduction in December, and then a final 25 base point reduction next March.
00:04:32
Speaker
And that view has been because of this, again, really this tension between inflation and employment. Now, I do think what we will see is that the FOMC policymakers will be similarly divided.
00:04:44
Speaker
And when we dig into these projections, we may see evidence that different policymakers are emphasizing different sides of that tool mandate. And just to be clear, when you're talking about the projections, of course, the FOMC is releasing an update on its dots, as they're widely known, or or its projections.
00:05:01
Speaker
And I guess there'll be particular ah focus on what their projections are for rates going forward. Sort of are they hawkish or are they dovish?
00:05:13
Speaker
Yes, that's right. And of course, when we say hawkish or dovish, that's in a relative sense because I think most of the policymakers will be supportive of at least some rate reductions.
00:05:25
Speaker
But it's relative to market pricing and you know pre-existing views going into the meeting about, as you said, the speed and pace of future easing. And here is where I think, you know, we're going to see those signs of tension. And in the markets, of course, we are focused on the outcome, which is where do the rate projections sit?
00:05:44
Speaker
But the underlying reasons are going to be straightforward. Those that are more concerned about inflation risks are going to call for slower and fewer rate cuts. And those that are more concerned about inflation.
00:05:56
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labor market conditions, whether the unemployment rate could be approaching 5%, you know, as soon as this year or early next, we'll be emphasizing that side of the mandate and therefore are more likely to project faster rate cuts.
00:06:08
Speaker
And just to be clear, your views are more in line with the first camp that you described, right? Well, yes. I mean, again, this has been the key underpinning behind our view of somewhat gradual rate cuts, this idea that inflation will remain sticky well into next year. And actually, we continue to project that core PCE inflation will still be above 2.5%, even at of 2026.
00:06:35
Speaker
That I think will actually, even even after the Fed updates its projections, um we will continue to to probably project ah some some more pessimism, I should say, on the inflation side. And so that's really the main factor that could complicate rate cuts and the Fed's decision making.
00:06:55
Speaker
So those are the projections, obviously looking at the dots, seeing how it compares with the market expectations, and also what comments are made around the state of the US economy.
Leadership Changes at the Fed
00:07:07
Speaker
Then we have the press conference. um Fed Chair Jerome Powell, will he address some of these questions around Fed independence and the composition of the Fed board, do you think?
00:07:19
Speaker
Well, I think we can say that Chair Powell will be asked about these questions. And of course, the response likely will be to stress the importance of Federal Reserve independence and and really the idea that the decisions are being made on the basis of incoming economic data. Which is, of course, what he emphasized at the last press conference.
00:07:38
Speaker
Yeah, that's right. So, you know, there's a good chance that we'll hear largely more of the same. But in the background, of course, the the the dynamic is that Fed Chair Powell's term as chair ends in May of next year. So we will have a new Fed chair.
00:07:52
Speaker
And also there are ongoing questions about the composition of the broader Board of Governors. And and even going into the September meeting, ah there's likely to be some some some changes compared to earlier meetings this year.
00:08:03
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And I guess that composition ultimately could play into this debate about ah what ah part of the dual mandate the Fed will emphasize going forward.
00:08:14
Speaker
Just to be clear, though, in your you know research, I think you also highlight that your forecasts are based on that the policymakers will be responding to data rather than looking ahead, anticipating personnel changes or shifts of that sort.
00:08:30
Speaker
Yeah, I mean, it is a very complicated question. I guess what I would want to emphasize is that the different policymakers do have differences in views. And, of course, if the policymakers are actually changing, then, of course, ah well, that stands to reason. that That, of course, represents a shift in view. So I do think the substance matters quite a lot.
00:08:48
Speaker
um You know, there is definitely a a tension between between what's happening on the labor market side and the inflation side. And, of course, the views of the policymakers reflect that. So Ryan, that's really interesting and it'd be great to get updates, I suppose, especially as we get some more visibility and on some of these changes.
US Fiscal Deficit Issues
00:09:06
Speaker
um But let's just shift to another big issue for the US, the deficit. ah You've recently published some updates on on your forecasts for the US deficit going into it next year and beyond.
00:09:21
Speaker
What are your expectations? It's going to be above $2 trillion, dollars right, for some time. Yes, that's right. we We recently took a little bit of ah deep dive into at least two of the main factors that will impact federal deficits, which are, number one, the passage in July of the One Big Beautiful Bill Act, which should lead to some reductions in household and business taxes, ah but then also the increase in tariff revenue that has clearly been coming through this year and, depending on what happens to to various tariffs, is likely to continue to generate revenue next year.
00:09:56
Speaker
Now, all else the same, these should have some offsetting impacts, not just on deficits, but on the economy as well. You know, the lower household and business taxes should be a net fiscal impulse for the economy, whereas the higher tariff revenue acts as a x as the opposite.
00:10:13
Speaker
So, you know, this is interesting and all else the same that fiscal impulse coming from the One Big Beautiful Bill Act is maybe another reason why we are projecting a little bit more gradualism from the Fed in terms of rate cuts.
00:10:29
Speaker
Has the Fed said much about the deficit recently? Well, the Fed doesn't have primary responsibility for fiscal deficits. Of course, you know, the the the real policymaking is is dependent on on tax revenue and expenditures as the policy is formulated by the U.S. Congress and the administration.
00:10:52
Speaker
Of course, yeah. So, yeah. ah But, you know, I think it's it's it's it's well accepted that the current budget deficit, as you mentioned, likely to exceed $2 trillion dollars next year, exceeding 6% of GDP on our estimates for the fourth consecutive year next year, is ah by definition not sustainable unless you have extremely rapid rates of nominal GDP growth.
00:11:16
Speaker
So, Ryan, thanks for all those updates. And just to recap, we're expecting a 25 basis point rate cut next week. And then we'll be particularly watching for the split in views amongst f FOMC members on their rate projections going forwards and whether that is kind of falls on the relatively hawkish versus the relatively dovish side.
00:11:40
Speaker
Yeah, that's right. Keep an eye on those dots projections for the end of this year. Thanks, Ryan. Thanks, Aline.
00:11:49
Speaker
So a few updates now from around global investment research. The latest edition of our global macro investor has just published, led by Murat Olgun, our global head of macro strategy.
00:12:01
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The report brings together top themes and our best trade ideas across asset classes and geographies. Interestingly, one of the themes is fiscal intolerance, with markets not that tolerant of fiscal deterioration, so actually quite topical given what we've just been talking about.
00:12:19
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We've also published a look by our credit strategist, Song Jin Lee, on what financial repression could mean for bond investors. Now, if you don't know what that means, you're not alone, but it's where interest rates on government debt are held below the market rate.
00:12:35
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Last time this happened was about 80 years ago, so the fact that we're making comparisons to that period is is interesting in itself. And our global economist, James Pomeroy, has published his monthly chart book assessing the latest global macro data, which, of course, can give some broader context to what's going on.
HSBC's New Research Features
00:12:56
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Now, you're listening to this podcast, so you probably like audio. But did you know that our mobile app can now read out our research to you? So wherever you are, you can listen to all of our research summaries hands-free.
00:13:11
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And if you are an HSBC Global Investment Research client, download our app on Apple's App Store or Google Play now. And finally, if you'd like to get in touch with us, please email at askresearch at hsbc.com.
00:13:30
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So that's all from us this week. From all of us here, thanks for listening. And please join us again soon for more insights and views on the macro brief.
00:13:58
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Thank you for joining us at HSBC Global Viewpoint. We hope you enjoyed the discussion. Make sure you're subscribed to stay up to date with new episodes.