Fidelity: Fed delivers hawkish cut as policy upheaval comes into focus

Fidelity: Fed delivers hawkish cut as policy upheaval comes into focus

December 19, 2024

Interest Rates Fed
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Commenting on yesterday’s Federal Reserve decision to cut rates by 25bps, Salman Ahmed, Global Head of Macro & Strategic Asset Allocation at Fidelity International said:

“The Federal Reserve (Fed) cut the Fed Funds Rate by 25 basis points (bps), as widely expected, bringing it to 4.5%. While Chair Powell acknowledged this was "a closer call" than previous meetings, he emphasised it was "the right call" given current conditions. This follows recent FOMC communication emphasising the merits of "gradual" policy normalisation, supported by resilient economic fundamentals and rising policy uncertainty with incoming President Trump.

“A significant modification to the statement language reinforces this measured trajectory. The incorporation of "the extent and timing of" signals a slower rate cut path ahead, with markets now pricing a 90% probability of a January pause, aligning with our assessment. Powell reinforced this message, noting that while policy remains restrictive, they are "significantly closer to neutral," justifying a more cautious approach reflected in the reduction from four to two projected cuts in 2025.

“The Summary of Economic Projections (SEP) showed hawkish undertones as well. The 2025 dot removed two cuts, exceeding market expectations of just one less cut. This adjustment comes alongside stronger growth projections, higher inflation, and lower unemployment in 2025. Powell cited higher-than-expected inflation in September and October as "probably the biggest factor for new projections," emphasising the need to see more progress on inflation before further cuts. Importantly, the committee's assessment of the long-run neutral rate shifted higher, with the median moving from 2.9% to 3.0%, and the central tendency range moving up to 2.8%-3.6%.

“There remains a considerable amount of uncertainty about the economy and the policy path over the coming months owing to potentially quite significant changes to the outlook when President Trump gets into office and implements his plans on tariffs, taxes, spending cuts, and potential deportations. Powell noted that committee members varied in their incorporation of potential Trump policies in their projections, with some citing increased uncertainty in their dot plot assessments. As he put it, "when the path is uncertain, you go a little slower." He also indicated the Fed stands ready to carefully assess policy responses once specific implementation details of proposed tariffs become clear.

“The Fed’s outlook now broadly aligns with our own expectations for 2025 and we will watch reflation (our current base case) as well as stagflation risks closely. We think odds for renewed rate hikes in the latter part of next year are rising.”

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