Payden & Rygel: Anticipating the US FOMC Meeting

Payden & Rygel: Anticipating the US FOMC Meeting

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Jeffrey Cleveland, Chief Economist of Payden & Rygel, shares his notes ahead of the US Federal Open Market Committee Meeting (29th and 30th January).

  • The Fed will likely hold rates steady at the January FOMC meeting, which makes January the first “pause” since the Fed began cutting in September 2024. At the press conference, Chair Powell will likely suggest that while the progress on inflation since the 2022 peak has been impressive, year-over-year rates stagnated due to slightly stickier inflation readings in Q4 2024. Further, job growth in the fourth quarter remained strong (170k), and Q4 GDP, which will be released on Thursday, is tracking at a 3.2% annualized quarter-over-quarter rate. Both the jobs and GDP data should give the Fed more comfort in waiting for more data on inflation before cutting rates again. 
  • Second, Chair Powell will likely reiterate that the Committee will take a more cautious approach to monetary policy easing in 2025 but won’t give forward guidance for March. The Fed continues to be data-dependent and will make decisions “meeting by meeting.” The core personal consumption expenditures (PCE) price index for December, which will be released on Friday, is expected to increase by 0.19% over the month, consistent with the Fed’s 2% target. If inflation remains in line with expectations, year-over-year inflation will cool more quickly toward 2% as soon as the end of the first quarter of 2025, which could allow the Fed to cut again, maybe in March. We think the Fed will end up cutting more than is currently priced in as inflation moderates and/or the labor market continues to cool down.
  • At the press conference, Chair Powell will suggest that the Fed won’t presume and will consider the impact of fiscal policies once they are implemented and more details are available. While we’ve seen a flurry of executive orders during Trump’s first week in office, significant policy changes—big enough to alter the economic trajectory outlined above—will take longer to play out and even longer to implement.
  • Lastly, the Fed might discuss its balance sheet plans in 2025, suggesting that QT could continue for at least the first half of 2025. While many market participants expected the Fed to halt QT in late 2024, the Fed has continued shrinking its balance sheet at the current pace. Reserves dropped sharply in the second week of January 2025 before picking back up quickly the week after. Still, reserves are now much closer to the “10% of nominal GDP” threshold suggested by Governor Waller as a key benchmark. However, overnight rates have remained below the upper bound of the fed funds rate, suggesting that we are not near “liquidity scarcity” just yet.