abrdn: Fed stepping down a gear

abrdn: Fed stepping down a gear

December 19, 2024

Interest Rates Fed
Rente (01)

The Fed delivered a 25bps cut today, taking the total reduction in interest rates to 100bps over the past three months.

However, Chair Powell struck a hawkish tone at the press conference, and FOMC members expect just two rate cuts next year, down from four in September. In part, this moderation reflects the distance the Fed has already travelled, with Powell keen to flag the work the central bank has done in dialling back policy restrictiveness. It also reflects renewed concerns over inflation, with Powell lamenting recent data disappointments, even if he is adamant the Fed remains on track to hit its target.

Alongside firmer short-term inflation, Powell was open that some members raised their forecasts for next year based on assumed policy changes under a second Trump term, and others now see risks to the upside. Powell was keen to avoid being drawn into a hypothetical conversation around tariffs or immigration, but he did argue that policy uncertainty added to the case for a slower pace of easing. Fading risks in the labour market were also cited as justification for less urgency, even if Powell warned that conditions here continue to cool.

These signals cement our view that the Fed will pause in January as it shifts to a slower pace of easing. We expect a cut in March, contingent on a continued cooling in inflation. Thereafter, the Fed’s hawkish tone presents some risk to our forecast for three cuts in 2025, especially in the case of early policy fireworks from the new administration.

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