Fed December Preview – Inflation Risks Back in the Spotlight
The final Fed meeting is around the corner. A rate cut is a done deal, and the focus is on the FED’s guidance with regards to inflation risks, potential for January cuts and of course whether the Fed projects two or three rate cuts in 2025.
Executive summary
Market is pricing roughly 50 bps of cuts next year. Focus has again pivoted from labor markets to inflation as inflation progress has stagnated.
January cut signals are only important if the Fed explicitly leaves door widely open, closing the door for January is not a surprise nor dodging the question
Expect Fed to not incorporate Trump’s fiscal policy yet on its decision-making; flagging inflation risks from more expansionary fiscal policy already would be hawkish
The dot plot is likely to signal three cuts next year, but the hawkish risk of two cuts would provide USD further catalyst if accompanied by hawkish press conference
· USD has recently been on a tear due to tariff fears and the market has latched a bit to the narrative on rising inflation. Given Tariff news is likely to remain light, Fed and evolution of inflation narrative to drive price action over the holiday season and early January
We have prepared four scenarios in preparation of the event and are happy to share our key takeaways below.
Jargon explainer
Dot plot: Fed officials' predictions on the future rate path are notoriously unreliable, and the Fed (and economists) often downplay the impact.
FG: Forward guidance. Verbal guidance on what size of rate moves the market can expect in the future.
PC: Press conference. The press conference is 30 minutes after the statement and can cause a re-assessment of the statement. The Fed often balances a hawkish statement with a dovish press conference.