The Federal Reserve just completed its final meeting of the year and as expected, cut the fed funds rate by 25bp (.25%) to 4.25% – 4.50%. This completes the last cut of the year with a total of 100bp (1%) of cuts for 2024. The release commented on elevated inflation, expanding economic activity, and an uncertain employment situation. They think they’ve achieved a balance in trying to reduce inflation and maintain high employment. (I think inflation is too high and the only reason the employment situation isn’t a disaster is due to government hiring.) Also notable that Beth Hammack voted against the 25bp rate cut. This is unusual because most Fed votes are unanimous.
There is a lot of attention right now on the dot plot where each Fed Governor makes predictions on where the fed funds rate will be in the coming years.
The 2025 estimate rose from 3.4% in the September dot plot to 3.9%. That implies expectations for 50bp of cuts in 2025 down from 100bp of expected cuts.
The 2026 estimate rose from 2.9% to 3.4%. That implies expectations for a total of 100bp of cuts (2025 plus 2026) down from 150bp of expected cuts.
When you hear people talking about a “hawkish cut”, this is what that looks like. They cut, but reduced expectations for future rate cuts.
I’ll be on Powell’s press conference which starts shortly and expect him to say they’re “data driven” and to find creative ways to not answer repetitive questions regarding the timing of the expected 2025 cuts. If there’s anything materially different from that, I’ll update this post.
My view is the Fed has already cut too soon and as long as Congress continues engaging in stimulus spending, they should hold the fed funds rate firm. Every inflation metric started rising right after the September rate cut so I would have preferred to see them pause. With that said, the DKI portfolio is well-positioned for more coming inflation so no changes are necessary right now.
The market is starting to realize the Fed is signaling a slower pace of rate cuts and is trading down ahead of Powell’s press conference. We note that the stock market often swings wildly in all directions during Powell’s talks so this is normal.
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