(Kitco News) - Although the global easing cycle is expected to continue through 2025, there are some important themes investors and analysts will be watching closely in the new year.
For many analysts, the Federal Reserve’s monetary policy remains the driving force of global financial markets as it looks to find a balance between persistent inflationary pressures and supporting economic activity.
Expectations around the Federal Reserve’s monetary policy have dramatically shifted in the last few weeks of 2024. In its final monetary policy meeting Dec. 18 the Federal Reserve suggested that it would only cut interest rates two times next year; In September’s updated economic projections, the Federal Reserve showed the potential for four rate cuts.
Analysts note that the Federal Reserve’s shift in monetary policy, which would see a slower easing cycle, makes sense as the economy is expected to remain relatively healthy at least through the first half of the new year.
Most major banks have pared back their interest rate expectations. Fixed income analysts at Bank of America are in line with the central bank’s forecast, seeing only two rate cuts next year. Wells Fargo is lightly more hawkish as the bank sees only one rate cut in 2025.
Blackrock, the world’s largest fund manager, is betting big on American exceptionalism as they push further into overweigh territory in U.S. equities.
The analysts at BlackRock note that the U.S. economy remains in the best position to benefit from “mega forces” in the economy like the rise of artificial intelligence (AI) that have upended the traditional business cycle.
“We think investors should focus more on themes and less on broad asset classes as mega forces reshape whole economies,” the analysts said. “We see the U.S. still standing out versus other developed markets thanks to stronger growth and its ability to better capitalize on mega forces. We up our overweight to U.S. equities and see the AI theme broadening out.”
However, Blackrock remains underweight U.S. Treasuries as they expect bond yields to rise through 2025 as the Fed is unable to cut rates aggressively.
“We don’t think the Fed is embarking on a typical cutting cycle. We think it will cut further in 2025, and growth will cool a little, but with inflation still above target the Fed won’t have room to cut much past 4%, leaving rates well above pre-pandemic levels,” the analysts at Blackrock wrote.
However, not all analysts are convinced that the U.S. economy will be able to withstand the geopolitical uncertainty and unintended consequences of President-elect Donald Trump’s proposed policies.
Ahead of his inauguration, Trump has threatened to impose trade tariffs on nearly every major economy worldwide. While the tariffs may help to promote domestic manufacturing and support the U.S. dollar, the policies will come at a cost and potentially add to the ongoing inflation threat.
In this environment, fixed income analysts at TD Securities are slightly more bearish on the U.S. and global economies and more dovish on U.S. interest rates as they still see four rate cuts in 2025 with the Fed Funds rate falling to 3.50% by year-end.
“The name of the game in 2025 is now uncertainty, especially in the US and Europe. The global economy is about to be subjected to some sizeable shocks, and politics will become increasingly unpredictable. Central banks are going to have to adapt their strategies quickly,” the TD analysts said. “To jump to the punchline, a Trump presidency means higher U.S. inflation and weaker global growth. But we expect more bark than bite for the most part, so while we work in higher inflation from tariffs and a (limited) labour shock from migration policies in the US, we factor in only mildly weaker growth in key trading partners. Overall, we expect global growth to remain slightly below its 3% trend.”
Analysts at TDS said that they expect the effects of tariffs will only start to be felt in the third quarter of 2025.
Looking at the impact the Fed’s monetary policy will have on gold, many analysts expect shifting interest rate expectations will create some short-term headwinds and volatility for the precious metal.
Bank of America expects fewer interest rate cuts from the Federal Reserve to support the U.S. dollar, which will present another major headwind for gold.
However, analysts still expect gold to push higher and even rally above $3,000 an ounce by year-end. Commodity analysts note that gold’s correlation with bond yields and even the U.S. dollar has broken down as central banks continue to buy massive amounts of the precious metal.
Many commodity analysts also expect that Trump’s tariffs and geopolitical uncertainty will add to the ongoing de-dollarization trend among many emerging market central banks.
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