US | Fed cuts rates by 25 bps, but signals a more hawkish pace going forward

Summary

With “the story of why inflation should be coming down [...] still intact,” the main reason behind today’s hawkish shift is likely the growing concern around the potential inflationary impact of Trump’s proposed trade, fiscal, and immigration policies.

Key points

• Key points:
• The Fed cut the policy rate by 25 bps to a 4.25-4.50%, but signaled that the rate-cut cycle will likely take longer than previously thought.
• The updated SEP points to a slower pace of monetary policy easing next year amid higher inflation uncertainty: “when the path is uncertain you go a little bit slower.”
• The 10bp increase in the 10-year Treasury yield (to 4.5%) following the meeting indicates that the market had not fully anticipated the Fed's more hawkish tone.
• A “new phase in the process” of easing means the Fed is likely to gear policy to a more hawkish path as it is now thinking about the effects of likely policy changes.
• We now think that the Fed will skip cutting rates in the first meeting of next year and cut the fed funds rate by 25 bps in March and June.

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