A Hawkish FED Rate Cut Expected to Send USD Higher
Today everyone expects the FED to lower rates by 25 bps, however they’re likely to sound less dovish for 2025 which would benefit the USD, but that’s not as straightforward either.
A Cautious Stance Forward for the FED
Fed officials have signaled a more cautious tone regarding further rate cuts. Some policymakers prefer to wait for more concrete evidence of a decline in inflation or a softening labor market before committing to additional easing. While the December cut signals the Fed’s willingness to adjust monetary policy, the broader outlook suggests a careful balancing act to avoid exacerbating inflation risks while supporting growth.
This cautious yet flexible approach underscores the Fed’s focus on maintaining economic stability while addressing inflationary challenges in a measured manner.
Credit Agricole’s Forecast and Fed Outlook
Credit Agricole anticipates a 25 basis point rate cut at the Federal Reserve’s December FOMC meeting, reducing the federal funds target range to 4.25–4.50%. This decision, largely expected by markets, aligns with ongoing efforts to adjust monetary policy amidst persistent inflation and strong economic conditions. However, the Fed is likely to strike a hawkish tone, signaling a cautious approach to further rate reductions in 2025.
Rate Cut Trajectory and Guidance
The December rate cut would mark the third consecutive reduction in 2024, bringing the total annual decline to 100 basis points, consistent with market consensus. Chair Jerome Powell is expected to emphasize a data-driven approach in forward guidance, leaving the door open for a potential pause in rate cuts by early 2025. This open-ended stance reflects the Fed’s sensitivity to evolving economic data.
Economic Context and Easing Cycle
November’s inflation and employment data support the Fed’s decision to ease rates. However, persistent inflationary pressures are expected to slow the pace of future cuts, as officials remain cautious about the outlook. According to Fed insider Nick Timiraos of The Wall Street Journal, there is an increasing tendency among policymakers to reassess rate targets for 2024, with adjustments to higher levels potentially on the table this week.
Dot Plot Projections
The Dot Plot Outlook indicates that the median rate could rise to 3.625% in 2025 and gradually fall to 3.125% by 2026, reflecting projected declines of 75 basis points in 2025 and 50 basis points in 2026. This projection underscores a more measured easing cycle compared to earlier expectations.
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