Todays conference gave me the feeling that the December rate cut is not assured at this point. And if the economy maintains its resilient performance, the pace of rate cuts in 2025 may slow accordingly.
This outlook arises from the ongoing uncertainty around the neutral rate level, with the possibility that it may be higher than previously estimated. However, Powell emphasized that the risks of overtightening versus under-tightening are currently balanced.
The market appears to have interpreted the message similarly, as the odds of a December cut and additional rate cuts in 2025 have slightly decreased
Notes:
Trump Presidency
Powell clarified that the Fed does not expect immediate policy effects from the incoming administration. While fiscal policy changes, can influence economic outcomes, the Fed will consider these impacts once the specifics become available.
Powell emphasized that, legally, the President does not have the authority to remove the Fed Chair.
Inflation
Recent inflation data came in slightly higher than anticipated. Anticipate some bumps in inflation ahead, though the trend remains downward.
This is not an overheated economy. Much of the inflation observed this year represents âcatch-upâ inflation in housing rather than ongoing pressures.
Current renter inflation data reflects a lag from prior conditions. Newly signed leases are showing low inflation, which will gradually appear in broader measures.
Despite increases in break-even inflation rates, Powell did not observe significant de-anchoring of long-term inflation expectations, indicating continued confidence in inflation moving toward the 2% target.
Labor Market
Average monthly job gains over the past three months stand at 104,000, a marked slowdown from earlier in the year. The labor market is currently slightly weaker than pre-pandemic.
Powell indicated that the Fed is keen on maintaining a strong labor market while avoiding unnecessary cooling that could weaken economic activity.
Current wage increases are now roughly in line with inflation at 2%, assuming productivity gains remain strong.
Long-term yields and rates
Powell attributes higher Treasury yields since September to stronger growth expectations and reduced recession risks, rather than heightened inflation expectations.
As the Fed approaches neutral territory, the pace of rate cuts could slow, a consideration that is only now starting to take shape.
The Fed remains flexible and will adjust its view on the pace and endpoint for rate changes as the economic outlook evolves.
Fiscal Deficits
Powell acknowledged the unsustainable path of U.S. fiscal policy, with deficits increasing despite full employment.
Fed views high and rising debt levels as ultimately a longer-term threat to economic stability. However, he reiterated that fiscal policy is beyond the Fedâs direct control and urged responsible management.
I=7 Powell said they donât have to be in a hurry to cut interest rates further
Powell said the performance of the economy means that they donât have to be in an hurry to cut interest rates.
âThe economy is not sending any signals that we need to be in a hurry to lower rates,â said in a speech to business leaders in Dallas. âThe strength we are currently seeing in the economy gives us the ability to approach our decisions carefully.â
The probability of a 25 basis points rate cut in December were lowered to 58.7% from 67.82%.
The Federal Reserve is not at risk of losing its independence. Its self-funding structure ensures autonomy from government interference in spending and hiring decisions.
Declining response rates in surveys have increased data volatility, making revisions more common and potentially less predictable.
The Fed does not create policies based on still uncertain assumptions of future fiscal policies.
The Fed has no role in immigration policymaking, even though immigration has positively contributed to the economy thus far
The Fed does not consider national debt levels when setting interest rates. Its mandate is focused on price stability and maximum employment.
Aggregate economic data remains strong, with the economy performing better than anticipated in September. However, pressures are evident among lower-income consumers, a trend that wasnât as evident two years ago.
Bitcoin is viewed as a speculative asset and a competitor to gold, not as a rival to the U.S. dollar.
The market has decreased the amount of cuts expected significantly, the December cut is still not that clear
I=10 Fed cuts interest rates by 25 basis points as expected, turns more hawkish regarding next year rate cuts
The Fed cut its key interest rate by 25 basis points to a target range of 4.25%-4.5% as was widely expected by the market.
However, its âdot plotâ indicated that it would probably cut it two times next year, down from four that the matrix indicated in September.
In a post-meeting call, Jerome Powell pointed out that the policy is now significantly less restrictive.
âWith todayâs action, we have lowered our policy rate by a full percentage point from its peak, and our policy stance is now significantly less restrictive,â he said. âWe can therefore be more cautious as we consider further adjustments to our policy rate.â
Powell added that going forward they will move much slower with regards to rate cuts.
âWe moved pretty quickly to get to here, and I think going forward obviously weâre moving slower,â Powell said.
Powell signaled that the Tariffs brings some uncertainty next year.
âItâs very premature to try to make any kind of conclusion. We donât know what will be tariffed, from what countries, for how long and what size. We donât know whether there will be retaliatory tariffs,â Powell said. âWhat the Committee is doing now is discussing pathways and understanding the ways in which tariffs can affect inflation.â
He pointed out that the Fed is not looking to add Bitcoin.
âWeâre not allowed to own bitcoin. The Federal Reserve Act says what we can own, and weâre not looking for a law change. Thatâs the kind of thing of thing for Congress to consider, but we are not looking for a law change at the Fed,â Powell said.
The committee raised its projections for PCE inflation in 2024, 2025 and 2026 to 2.4%, 2.5% and 2.1% from 2.3%, 2.1% and 2.0% respectively.
The Federal Reserve delivered a hawkish message in its latest meeting, signaling not only a reduction in the anticipated number of rate cuts but also a significant upward revision to inflation forecasts, along with an acknowledgment of upside risks to inflation.
The FED is once again shifting its focus to inflation from unemployment.
While I remain skeptical about the accuracy of the Fedâs projections (given their poor track record), my concerns are around:
The Fedâs credibility is once again under pressure. The rapid flip-flopping in policy signals and focus over just a few meetings has eroded confidence. The reliance on a highly data-dependent approach, without a clear proactive plan, underscores the lack of forward-thinking in their planning.
The Fedâs inconsistent signaling is only amplifying uncertainty and volatility in financial markets. Currently, there is not a clear trajectory, and each pivot by the Fed now triggers overreactions in either direction.
The decision to aggressively cut rates in September may have been a mistake. They conditioned themselves to further easing when the economy maybe did not need it yet. A more measured approach waiting to thoroughly assess whether unemployment was genuinely set to rise might have avoided it.
Currently, markets are pricing in only one rate cut for 2025. The positive takeaway here is that expectations are already set at a very low bar for rate cut surprises, should economic data fail to come in as hot as anticipated.
This doesnât necessarily require a recession, just a modest economic slowdown or softer data in what many are expecting to be a very strong 2025 could be enough to shift expectations toward additional easing. This would be bullish for the markets.
In my view, the Federal Reserve appears to be positioning for an extended pause. If we do see a rate cut, it is unlikely before May or June, given inflationâs historical pattern to run hotter during the first half of the year.
While I have previously noted the increased inflationary risks following the Trump election, it is still too early to have definitive conclusions about the impact of his policies.
While the potential for upward inflationary pressure exists, there is insufficient evidence at this stage to assert that inflation will accelerate meaningfully in the near term, but is in my view that we will continue to see stickiness in its developments.
FED Decision and New Projections
The FED cut 25bps in the December meeting. But there was 1 dissent, and 3 other non members also dissented. Indicating further rate cuts will ve more difficult to get.
Only 2 more cuts are projected for 2025. They removed 2 from the forecasts, which was in line with expectations.
15 or 19 judged the risks around the inflation forecast (which were raised) were weighted to the upside. (only 3 in September). The Fed is now sifthing its focus to inflation risks.
The decision to cut rates was appropriate, they need to balance risk on both sides.
Labor market risks have diminished, but the market has loosened. Further loosening is not needed to achieve the inflation target.
Some Fed members factored fiscal policy uncertainty into their outlook, raising concerns about upside inflation risks in 2024.
Todayâs decision was a closer call. Further cuts will depend on notable progress in reducing inflation or additional labor market loosening.
The decision for fewer cuts due to stronger growth, fewer unemployment
risks, closer alignment with the neutral rate, and greater uncertainty around inflation.
A more cautious approach is now deemed appropriate, monetary policy still remains restrictive, but they are now closer to neutral rate.
Chair Powell sees Core PCE inflation at 2.5% by 2025 as significant progress. Inflation is not expected to reach the 2% target until 2027.
The FED will not settle for inflation above 2%.
Inflation is moderating more slowly than anticipated, largely due to the slow adjustment in housing prices.
Long-term rates are responding to a robust U.S. economy compared to global peers.
A rate hike is unlikely but cannot be ruled out in todayâs uncertain environment.
Key Points from the December 17-18 2024 FOMC Minutes
Inflation:
Inflation eased from its 2022 peak but remained somewhat elevated.
Core Personal Consumption Expenditures (PCE) inflation was 2.8% as of October, down from 3.4% a year earlier.
Some progress was noted, especially in core goods and market-based core services, with firms reluctant to increase prices due to consumer price sensitivity.
However, housing services inflation remained elevated, although slowing.
Risks to inflation were tilted to the upside due to:
Stronger-than-expected recent readings.
Potential changes in trade and immigration policies.
Persistent service sector inflation pressuresâ.
Labor Market:
The labor market showed signs of gradual easing but remained solid overall.
Key indicators:
Unemployment rate increased to 4.2% as of November.
Nonfarm payroll growth slowed slightly, partially due to strikes and weather events.
Wage growth was 4% year-over-year in November.
Labor supply and demand appeared to be reaching better balance, with some indicators (like job openings and quits) moderating.
Risks were seen as balanced, but concerns remained that slowing payroll growth might eventually soften the labor market furtherâ.
Rate Decisions and Monetary Policy:
The Committee lowered the federal funds rate by 25 basis points to a target range of 4.25% - 4.5%.
Continued solid economic activity and labor market strength.
Some participants expressed concerns about persistently high inflation and argued for keeping rates unchanged.
The decision was accompanied by continued balance sheet reduction, with the Fed maintaining its commitment to reducing Treasury and mortgage-backed securities holdings.
The Committee emphasized data dependence, indicating that future adjustments will be based on evolving economic conditionsâ.
Forward Guidance:
The Fed noted that while inflation was moderating, the process might take longer than previously expected.
If inflation persists, the Fed might hold rates at restrictive levels longer or slow the pace of easing.
Conversely, policy could ease faster if labor market conditions deteriorate or inflation moves sustainably toward the 2% target sooner
End of Balance Sheet Runoff:
Market participantsâ expectations for the end of balance sheet reduction shifted slightly to June 2025.
This delay was mainly due to revised expectations among those previously forecasting an earlier end to the runoffâ.
Trump said he will demand for interest rate cuts due to oil prices going down because of his new policies.
Assessment: I am currently giving the possibility of Trump influencing interest rates in the short term as low (below 15%), this assessment could change next year when a new chairman is appointed.
Trumpâs options to directly interfere with the FED decisions are very low (Powell is not on good terms with him), and the ones he will most likely try are more indirect ways to try to influence the FED.
Trump options (with probability success on parenthesis):
Public or private pressure (medium): Trump is a good negotiator, we donât know what original tactics he could use for this. But currently, he is not liked at all by Powell.
Appointing Dove-leaning Governors or followers of him (medium): requires senate approval, and this would be until next year. He canât appoint new regional FED presidents though, lowering his success
Removing Powell (low): he can try to fire him, but the only way to succeed is if there is a justified cause or misconduct.
Legislative Push to change Law (low): very high impact, this could change the FED completely, but would need Congress approval, and probably a very slow process to complete
Devalue US Dollar (low): The treasury can exert control over the dollar, forcing lower rates for stability, but it is a very controversial policy overall due to the global implications, and donât think it is likely
Use rhetoric or policy to create uncertainty in financial markets (low): he could create fear that could push the FED to act, but he is instead opting for policies that will stimulate the economy
Invoke emergency powers in extraordinary circumstances (low): The economy is currently performing okay
FED January Meeting Expectations: FED is expected to keep the federal funds rate steady at the current range of 4.25% to 4.5%
This pause is seen as a part of a cautious approach by the Fed, waiting for clearer signs of economic weakening or further progress on inflation before considering additional rate cuts
99% probability priced in for a hold in tomorrowâs meeting
Fed expected to pause until May/June meeting
Only 2 cuts are expected in 2025, and 1 in 2026
Some of the analyst expectations or commented for the expected FED pause:
The economy is still running a bit hotter than expected. With GDP for Q4 expected to come in at ~3.2
Inflation progress has stalled out since the second half of 2024
All the fiscal policies proposed (tariffs, deregulation, taxes, immigration, oil drilling) create a lot of uncertainty, which is another reason to pause currently
Powell should signal a pause but without committing to a specific date because of all the uncertainty currently
Fed kept its key interest rate unchanged at a range of between 4.25%-4.5%, as was widely anticipated.
However, the post-statement said âinflation remains somewhat elevatedâ versus their previous statement which said inflation had made progress towards their 2% goal.
The committee now says unemployment rate has stabilized at a low level versus their previous statement which had noted an increase in the unemployment rate and easing of labor market conditions.
S&P 500 futures shed 0.8%, Nasdaq composite lost 1.1% while Dow Jones futures declined 0.4% briefly following the report.
Very inconsequential meeting to be honest (which seems it was his goal to not say anything important today), the only signal that was slightly hawkish in the report this time was completely dismissed by Powell in the press conference, and his tone this time instead sounded more dovish.
The FED still sounds without any clear direction and is extremely data-dependent, which I still think is adding to the huge uncertainty everyone is currently feeling.
Rates Expectations did not have any meaningful move after the meeting
The public pressure on Trump on the FED continues though
Some Powell Notes:
The Fed is not in a hurry to make any adjustment to rates
Powell says heâs had no contact with President Trump and when asked to comment on his reaction to what Trump says, Powellâs response was, âitâs not appropriate to do so.â He says the public should be confident they will continue to do their job as always
On crypto, he thinks banks are able to serve customers as long as they manage risk.
Powell says removal of âinflationâ line is just clean up to shorten sentence, not determination that inflation is rising again
Two last inflation readings have been positive, but they donât want to overinterpret only 2 good readings, and want to see serial good readings for further cuts
The range of possibilities is very wide for fiscal policies, especially tariffs, and canât really speculate on those yet to make policy
Reserves are still abundant, no date determined yet to end QT
He thinks still meaningful above the neutral rate (still restrictive), but that financial conditions are somewhat accommodative â IMO these donât make sense together, one or the other. It seems the FED is really lost about the neutral rate.
I=5 Powell reiterates that they are in no hurry to cut interest rates
In remarks before the Senate Banking Committee, Powell reiterated that they donât need to in a hurry to change interest rates and that the economy remains strong.
âWith our policy stance now significantly less restrictive than it had been and the economy remaining strong, we do not need to be in a hurry to adjust our policy stance,â Powell said. âWe know that reducing policy restraint too fast or too much could hinder progress on inflation. At the same time, reducing policy restraint too slowly or too little could unduly weaken economic activity and employment.â
He pointed out that current stance provides flexibility to deal with uncertainties.
âWe are attentive to the risks to both sides of our dual mandate, and policy is well positioned to deal with the risks and uncertainties that we face,â he said.
Futures fell by almost 0.3% on Powellâs comments.
Other comments from Powell February 11 2025 Speach
Overall hawkish tone from Powell again, it does seems they are very confortable with a pause until a significant scare on growth.
Bank reserves remain abundant, they are a long way away from ending QT
He believes neutral rate is meaningfully higher
They would only use QE again when rates are at zero
Powell says the Federal Reserve will never create a central bank digital currency (CBDC).
Powell says he is âstruckâ at the growing number of cases of Bitcoin and crypto firms that were debanked and he is âdetermined to take a fresh look at that.â
Powell stated they support establishing a regulatory framework for stablecoins to ensure consumer protection
Powell stated that there is *no time like the present" to put the U.S. budget on a sustainable path, subtly supporting fiscal hawks.
He emphasized that the Fed will follow the data rather than make premature judgments on trade policies.
The market has now pushed a second rate cut in 2025 to December o even January 2026
Powell downplayed a bit the hot CPI reading from January 2025
This is the same FED that said 2021 was transitory, so I do have a hard time trusting anything they say after it.
Still he says the most likely outcome is to remain on pause.
Some of Powellâs quotes:
âI would say weâre close, but not there on inflation"
âLast year, inflation was 2.6% â so great progress â but weâre not quite there yet,â Powell said, referencing tp PCE
âSo we want to keep policy restrictive for now,â
âWe donât get excited about one or two good readings, and we donât get excited about one or two bad readings,â
âThe underlying economy is very strong, but thereâs some uncertainty out there about new policies,â
I dont think this was politically motivated as the image suggest by is interesting to realized that maybe that 50 bps cut in sep was not a good idea
Some FED members discussed whether it would be appropriate to pause or slow QT temporarily due to potential swings in reserves linked to debt ceiling dynamics
Market expectations for the end of QT have shifted slightly later, to mid-2025, compared to prior expectations.
The Fed is considering potential changes to the maturity composition of its balance sheet once QT ends, aiming to bring it closer in line with the maturity structure of outstanding Treasury debt.
Fed noted that reserves remain abundant, but they could decline more rapidly than expected, requiring careful monitoring.
Reserves might decline quickly upon resolution of the debt limit and, at the current pace of balance sheet runoff, might potentially reach levels below those viewed by the Committee as appropriate
FED is expected to keep interest rates unchanged with a 99% probability according to market pricing
The first 2025 cut in June and the second one in September
FED expected to continue QT without changes at the March meeting, with expectations it might end around mid-2025, but thereâs uncertainty due to debt-ceiling concerns.
Reserves are expected to be at $3.125 trillion by the end of the QT process, compared with $3.3 trillion now, while the level of the Fedâs reverse repo facility, a proxy of excess liquidity, is estimated to be $125 billion.
Tomorrow we also get new FED projections, there are expectations for the FED to most likely keep cuts at only 2 in 2025 despite recent growth concerns due to the equal upside risks to inflation due to Trump tariffs.
Analysts expect a mild economic downgrade, with GDP forecasts reduced and inflation estimates revised upward.
It seems likely to me we will these revisions on their economic projections since this is also the current trend most economists are reporting on their forecasts.
As a reminder the FED projected two cuts in 2025 to get to 3.9%, and 2 more in 2026 to 3.4%.
Any up or down revision will most likely mean a market reaction since the marketâs current pricing is more o less in line with December projections.
I=6 Fed kept interest rate steady as expected, still expects two rate cuts in 2025
Fed kept interest rate unchanged in the range of 4.25%-4.5%, as was widely expected.
The officials said they still see another half percentage of rate cuts in 2025, implying just two quarter-point cuts this year, unchanged from December.
The âdot plotâ of officialsâ rate expectations is now turning hawkish, with four officials now seeing no changes to rate cuts compared to just one in December.
The fed scaled back its âquantitative tighteningâ program, now allowing just $5 billion in maturing proceeds from Treasuries to roll off each month, down from $25 billion, though it left $35 billion cap on mortgage-backed securities unchanged.
The officials lowered their projections for 2025 GDP growth rate to 1.7% from 2.1% and increased core PCE projection to 2.8% from 2.5%.
FOMC said âuncertainty around the economic outlook has increased.â
S&P 500 futures gained 0.8% while Nasdaq composite rose 1.2% following the report.
Despite some mixed signals, the market is mostly taking this as a positive/dovish meeting:
Despite the stagflationary feel in the new forecasts, the FED is still signaling 2 cuts in 2025 and the 2026, easing bias is still the base case.
The balance sheet run off of the US treasuries has almost been paused (only $5 billion a month), which was mostly unexpected and will help with some of the liquidity concerns that were present
Powell says tariff inflation could be transitory (being the FED I would have never said this after 2021 mistake, even if the logic/theory says tariffs create only a 1 time effect)
Particularly it seemed to me that the FED doesnât really know what to do yet and what the economic impacts will be, especially clear after Powell said in similar words that âThey have time to wait for more clarity because the uncertainty in forecasts is very high inside the FEDâ
The FED is really also at the expense of the fiscal policies, which are currently the primary driver of the economic outlook, and this is something where the FED can not do anything about it, and can only react to the consequences.
FED signals:
Economic projections: mixed (stagflationary)
Dots: hawkish
QT taper: dovish
FED Conference: Dovish
Cut Expectations did not change and the 10-year yield declined only 10 bps after the decision.
Fed Forecast assumes full tariffs retaliation, meaning worse case for now forecasted
Some of the rise in inflation, especially on goods, has been partly due to tariff, but separating the effects is pretty difficult.
Still early to have seen the full effect of tariffs on economic data
He thinks they are in a good place currently, and allows them to wait for more clarity on the outlook due to all the uncertainty currently
Powell thinks U Michiganâs inflation expectation going up significantly is an outlier for now, with other surveys and market base data not showing the same
Powell highlighted that the relationship between survey data and actual economic activity hasnât been very tight recently
He thinks the FEDâs tariff inflation base case is transitory, and they sometimes can look through this kind of inflation. Depending on the pass-through being fairly quick, and inflation expectations remain anchored.
Recession probability has increased in recent months, but still no super high
