Hawkish Fed Cut Rates As Expected; Signals Dramatically Less Aggressive Rate-Cut Cycle -

Hawkish Fed Cut Rates As Expected; Signals Dramatically Less Aggressive Rate-Cut Cycle

Dec 18, 2024Jeremy ParkinsonFinance0

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Since the last FOMC meeting – on November 7th – the dollar and stocks have rallied while gold and oil have lagged as the dollar flatlined (amid significant volatility on the way from various macro data surprises)…Source: BloombergMost notable is the fact that inflation data has dramatically surprised to the upside and ‘hard’ data (excluding sentiment/surveys) has also soared since The Fed started its rate-cutting cycle…Source: BloombergBear in mind that financial conditions are at around the same ‘looseness’ or ‘easiness’ as they were before the Fed started the rate-hiking cycle…Source: BloombergThe market is fully priced for a cut today but as the chart below shows, expectations for 2025 cuts have collapsed…Source: Bloomberg…prompting many to expect a so-called ‘hawkish cut’ today.
Fed members will also release a new Dot Plot today – we assume they will, as always, adjust towards the market which is currently dramatically more hawkish than the dots…Source: Bloomberg

So what did The Fed do?
As expected and fully priced in, The Fed cut its benchmark rate by 25bps to 4.25%-4.50% target range.The Fed also cut its overnight reverse repo facility rate from 4.55% to 4.25%.Key highlights suggest The Fed is anything but on an automatic easing path…

*FED TO ASSESS DATA REGARDING EXTENT, TIMING OF FUTURE MOVES

*FED SAYS CLEVELAND’S HAMMACK DISSENTED IN FAVOR OF NO RATE CUT

The Fed’s dots spiked significantly (as we warned), catching up to the market’s more hawkish views:
Breaking that down historically, 2025 expectations surged (catching up to the two cuts priced in by the market – from over 6 cuts earlier in the year)…
…and 2026 rate expectations are now at a record high…
The Fed also hiked its inflation forecast:

*FOMC MEDIAN 2025 PCE INFLATION FORECAST RISES TO 2.5% VS 2.1%

The Fed has clearly decided that Trump’s policies will be inflationary.To summarize – The Fed expects lower unemployment than it did in September (barely above where it is now), dramatically higher inflation than it expected, and significantly higher rates.There was nothing in the statement about QT – suggesting the pace of unwind will continue.Now the question is – how will Powell spin this?Read the redline of the statement below:More By This Author:Norway Considers Nationalizing Power, Limiting Exports, Amidst European Price Surge
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