David McNamara: US Fed has roiled markets with its 'hawkish cut'
As More Jerome Expected Hawkish Than Perceived Were Powell’s Ments Chair
The December meeting of the US Federal Reserve Open Market Committee (FOMC) saw the central bank cut interest rates for the third consecutive meeting. The target range for the Fed funds rate was reduced by 25 basis points (bps) to 4.25-4.50%, bringing the total rate cuts in 2024 to 100bps.
Markets were teed up for a rate cut, but Chair Jerome Powell’s comments were perceived as more hawkish than expected, leading to a sell-off in US equities, a rise in rate expectations, and a further strengthening in the dollar.
The FOMC statement after the meeting contained a minimal, but material change from recent statements.
In outlining the rationale for the further policy adjustments, the committee added the precursor phrase of “the extent and timing”. This phrase in effect raises the bar for further rate cuts in 2025, and this was reflected in the interest rate ‘dot plot’ also, with members pencilling in just two 25bps rate cuts next year compared to 100bps in September.
In the post-meeting press conference, Chair Powell elaborated further on the FOMC’s decision. He stated that the decision “was a closer call” while also saying “it’s a new phase, and we’re going to be cautious about further rate cuts”.
The updated economic projections show inflation is expected to be higher next year, alongside stronger growth and labour market forecasts.
Given the Fed began its cutting cycle with a bang in September with a 50bps cut, last week’s decision was something of a volte-face, catching skittish markets offside.
The surge in US equities post the US election was unlikely to persist and the Fed provided the catalyst for a sell-off. The question remains, what has changed policymakers' outlook so abruptly in the recent weeks?
The obvious answer is stronger-than-expected inflation, but Chair Powell also hinted that FOMC members may now be pricing in ‘Trump 2.0’ into their forecasts.
Of the 19 voting members on the FOMC, 15 judged the risks to the inflation outlook to be tilted to the upside, compared to just three in September, with President Trump’s policies widely expected to boost inflation further in the coming years.
Indeed, given the president’s rhetoric of late, it is likely he will begin with a series of protectionist trade and tariff measures early in his presidency, with the European Union the latest bloc to be threatened via social media in recent days.
This all adds up to a potentially uncertain and volatile period for markets in 2025.
- David McNamara is Chief Economist with AIB