Strong Growth Means Just Three More Fed Rate Cuts Ahead: RBC

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The U.S. economy continues to deliver robust growth, limiting the need for significant cuts from the Federal Reserve.

This is according to an analysis from Royal Bank of Canada that follows news the U.S. economy grew by an annualised 2.8% quarter-on-quarter in Q3.

"U.S. GDP growth remains strong despite high interest rates," says Abbey Xu, Economist at the Royal Bank of Canada.

The Q3 GDP docket revealed Government spending expanded by 5% in Q3, up from 3% in Q2, led by a surge in national defense spending.

RBC continues to expect that a much larger-than-usual government budget deficit will keep a floor under the economy, inflation and interest rates in the year ahead.

"Near-term interest rate cuts from current high levels are still justified, but we expect just three additional 25 bps reductions over the next three Fed meetings before pausing at 4% - 4.25% for the remainder of 2025," says Xu.

Economists think U.S. GDP growth will decelerate in the coming quarters as households exhaust their savings and manufacturing activity continues to struggle.

The labour market is expected to cool further, with the unemployment rate projected to increase to around 4.2% by the end of this year and 4.4% next year, consistent with reduced job openings and lower quit rates.

A softer labour market is expected to lead to slower wage growth, easing upward pressure on prices. This aligns with our base case, where headline inflation continues to trend down toward the Fed’s 2% target over the next year.

"The softening is consistent with a normalisation rather than faltering in the economy," says Xu.