Hawks are back in town (so stay nimble into 2025) …
Be careful out there as the Fed has chased rates markets in both direction
Summary
- Although the Fed cut rates by 25 bps at its December meeting, bringing total cuts in 2024 to 100bps, it was an uber hawkish last cut, (much more hawkish than our initial expectations). The general message from both the Summary of Economic Projections (SEP) and chair Powell’s tone at the press conference was hawkish given fewer cuts expected in 2025 and renewed concerns of sticky inflation.
- Post-meeting, the odds for a January cut are next to nothing. In fact, the first half of 2025 does not have a fully priced in 25bp cut now. The first full 25bp cut is in September, with total 2025 pricing slightly above 1 cut. This is problematic because the Fed’s new SEPs just converged to prior rate levels. Overall, we are advocating to stay nimble into 2025 as all the Fed has been doing is chasing market expectations (and it is year end, so air-pockets can form where rates drift higher).
- Although minor, they also cut the RRP offer rate by 5 bps to 4.25%, bringing that rate flat to the lower band of the Fed Funds target range.
