“The Fed cut rates as expected. Our priority is understanding how it intends to reconcile support for a weakening labour market with some inflation concerns, particularly in light of rising political pressure to loosen policy.”
- With its recent rate cut decision, the Fed has lowered its benchmark rate for a total of 75bp this year.
- The Fed emphasised that the “extent and timing” of future decisions would be based on the incoming data around employment, inflation, and economic activity.
- The Fed also initiated purchases of T-bills to maintain liquidity in the markets.
The Federal Reserve (Fed) reduced its target federal funds rate by 25bp at its December policy meeting. Chair Powell acknowledged that risks to both sides of the Fed’s dual mandate — inflation and labour markets — remain. However, we believe some signals from the Fed suggest labour markets are weaker than current data indicates. For instance, Chair Powell pointed out that current data may be overstating monthly payroll growth. We believe such concerns may explain why the majority of FOMC members voted for the rate cut, with one member dissenting in favour of a larger cut and two members voting for no change. Looking ahead, we maintain our projection of two rate cuts next year because of weakening consumption and softening labour markets. Inflation, which remains above the Fed’s 2% target, is likely to slow from current levels, but tariffs are a risk we are monitoring.
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