A hawkish cut, a split house, and a Fed Chair on borrowed time

Adam

Summary:

The Fed delivered a hawkish rate cut amid deep internal splits, signaling limited easing ahead, while upbeat forecasts lifted markets and uncertainty grew over Jerome Powell’s looming replacement and future Fed leadership.

‘Tempus fugit, ’ as we cry out at closing time in my local Wetherspoons.

We’re already more than a quarter of the way through December and speeding at full throttle towards year-end.

Where has the time gone? The Federal Reserve has just held its last meeting of 2025 and cut interest rates by 25 basis points, as expected.

Ahead of the decision, analysts were calling for a ‘hawkish cut’, and that is pretty much what was delivered.

The FOMC’s ‘Dot Plot’ (part of the quarterly Summary of Economic Projections) had a median forecast of just one-quarter-point cut next year, probably in the first half.

But there was a great deal of dispersion across the dots.

Out of the nineteen FOMC members, one anticipates six cuts next year (that would take the Fed Funds rate down to 2.00-2.25% from current levels, well below inflation forecasts), while at the other end, three members see one rate hike.

According to the CME’s FedWatch Tool, the ‘real money’ sees one, maybe two reductions, which is pretty much in line with the Fed itself.

We now have another twelve months to go before we’ll know how accurate this prediction turns out to be.The Fed’s current rate-cutting cycle began back in September 2024 when they surprised most people by announcing a 0.50% reduction.

This was double the forecasts, and somewhat controversial given that it came just two months before the Presidential Election.

The Fed made two further quarter-point cuts before the year-end, before going on hold until this September, blaming the possible inflationary effects of tariffs.

This drew the ire of President Trump, who felt that the US central bank had politicised monetary policy, and he may have a point.

Overall, rates were reduced by 100 basis points last year, and a further seventy-five points in 2025, for a total of 175, taking the Fed Funds rate range down to 3.50-3.75%, its lowest in over three years.

All that monetary stimulus was a pretty powerful tailwind for risk assets, which, given yesterday’s forecast, will lose a lot of its force going forward. Despite this, the FOMC vote breakdown shows little appetite for raising rates, so that’s a blessing.The rest of the FOMC’s Summary was also quite upbeat. Members upgraded their growth outlook for next year.

They now expect GDP growth of 2.3%, up from 1.8% in September.

Inflation (as measured by Core PCE) is expected to moderate to 2.5% by the end of 2026, down from its current reading of 2.8% annualised, and below September’s prediction of 2.6%. It is still expected to hit the Fed’s 2% target in 2028.

Meanwhile, Unemployment is forecast to hold steady at 4.4%, which remains historically low.

All in all, that’s a fairly solid set of forecasts, which was enough to see risk assets rally and the US dollar fall.

In his subsequent press conference, Chair Jerome Powell said that the Fed was now in ‘wait and see’ mode, as is Mr Powell himself.

His second term as Chair ends in May, yet speculation over the identity of his successor has been swirling around since President Trump’s inauguration in January.

Mr Trump has said he has decided on his preferred candidate, and Treasury Secretary Scott Bessent has suggested that this could be announced before Christmas.

Kevin Hassett, the current Director of the National Economic Council, is considered the shoo-in candidate.

He’s a well-known Trump supporter and a well-known dove.

But Kevin Warsh can’t be ruled out either. He has served as a member of the Federal Reserve Board of Governors and is a Republican.

He’s also a handsome chap, which may give him an edge over Mr Hassett in President Trump’s eyes. Let’s keep the Administration beautiful.What does all this mean? Well, there’s some uncertainty creeping in over at the Fed, and evidence of growing diversity of expressed opinions.

It also feels as if the rule of the Chair won’t be quite as absolute as it has been in the past.

These aren’t bad things. It’s time that the Fed had a bit of a shake-up. But once his replacement is named, Jerome Powell’s life is going to get a lot harder.

There will effectively be two Fed Chairs for the next five months, and both will be scrutinised intensely.

Disagreements will be highlighted. And that has the potential to affect decision-making negatively.

Source: invezz

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