- The U.S. Federal Reserve cut interest rates on Wednesday by -25 bps to 4.25% to 4.50% range.
- Inflation is back on the radar, it is taking longer to reach the 2% target.
- Forecasting two rate cuts vs earlier expectation of 4 cuts for next year.
- Trump second term adds uncertainty to the outlook.
The Federal Reserve cut interest rate on Wednesday, as 98.81% CME Fed watch was indicating prior to the meeting. Jerome Powell specifically mentioned further decline will hinder further lowering robust high inflation which Is a focal point for 2025 Fed policy.
The key focus on inflation is a major change in policy from September when officials saw the labor market softening as the greater risk.
Powell discussed at length the in which inflation has improved since peaking in 2022, later moved sideway in recent months, with shelter costs improved more slowly than the Fed expectation.
Another challenge the Fed is going to face is about three “T’s” Trump, Tariff and Tax reduction. The Fed is expecting higher inflation in 2025.
CME Fed Watch:
- The latest Fed Watch indicates 91.4% probability of no rate hike on January 29, 2025. Nine days after Trump will be in the president's office.
- Fed Fund futures market is not anticipating any rate cut until June 2025, what a shift on day can make.
FOMC Projection (DOT-PLOT)
- The Fed’s dot plot records each Fed official’s projection for the Fed Fund rate on a quarterly basis.
- Green dots indicate the median projections (Source Federal Reserve/Bloomberg).
Technical Analysis Perspective:
- The US Core inflation YoY has remained above 3.2% since August 2024.
- A key observation from the following chart suggests that if the core inflation rises higher from 3.2% to 3.3% like in August 1992, it takes a couple of months before it goes lower.
- From September 1992 the Fed kept the rates unchanged for a couple of months to bring the inflation down below 3% and raised rates once inflation dropped to 2.8% in April 1994.
- Since August 2024 Core inflation has been maintaining 3.2 to 3.3% suggesting that the Fed will have to be patient before the inflation meets its target of 2%.
- Fed may keep the rates unchanged for the next couple of meetings in 2025.
The US Core Inflation YoY chart overlayed with US Interest Rates:
