The rate reduction process has not ended, but is suspended until further notice. Trumponomics will define the real stroke. Wall Street was not pleased to learn of Powell’s withdrawal of collaboration.
Jerome Powell’s Fed did what was expected, and a little more. He complied with the rate reduction, the third since September. This closes a “calibration” phase -Mary Daly said- that sank the fed funds rate from 5.50% to 4.50%. And he positioned himself where he wanted to face what is coming, John Williams said. And what is coming? In a word (which the Fed prohibits itself from saying): Trump.
The central bank surprised by recognizing that its inflation projection for 2024 “it broke into pieces”Powell said. The data, of course, is known. But inflation has risen since September pari passu with the rate reduction, and the Fed did not flinch. And in its new projections, in 2025 it will not drop to 2.1% as estimated when the pruning began. 2.5% is your corrected forecast. Worse still: the 2% goal will not be reached before 2027. Given an exceptionally robust economy – GDP grew 3.1% in the third quarter and would repeat it in the fourth, according to the Atlanta Fed – Inflation is once again the priority of monetary policy. The obligatory question, if so, is why did he cut the rate on Wednesday? Because Powell imposed it. There is no other answer. The important thing is to understand that it will not be lowered again if inflation does not decrease first.
Lower the rate, a close decision
It was a close decision, say everyone who participated. So much so that it could not be taken unanimously. Just as when Powell pushed for a half-point cut in September, there was dissent. That time it was Governor Michelle Bowman. This week it was the turn of Beth Hammackfrom the Cleveland Fed. Your vote should be examined because it will be the majority vote at the next meeting. He raised the convenience of leaving the rate unchanged. And to keep it there until “new evidence emerges that inflation returns to the path that leads to the 2% target.” Elementary, Hammack. “The economy is very good, but there is work to do with inflation.” Unobjectionable, but go to the corner alone. She is not punished. It is a sensible recommendation. Only it will only be applied at the January meeting. Nine days after Trump’s inauguration. Rate futures agree (and assign it a 91% probability). Better late than never. “If inflation stays above 2% for a long time, it could undock inflationary expectations,” Hammack warned. Not even saying it. The expected inflation implicit in the prices of ten-year Treasury bonds rose 30 basis points since September, from 2% to 2.30%.
The long rates, to tell the truth, have been voting in dissent for three months. The Fed cut short rates by a full point. And stubbornly, bond yields rose a full point the other way around. The inflation premium rises, but real rates rise more. The economy is a rock and there is no need to stimulate it. Telephone for the central bank and also for the new Administration. Now that the Fed has lowered rates for the third time and has a free hand, it will take the call. Says Mary Daly of the San Francisco Fed: “The recalibration phase is behind us, a new phase begins, focused on analyzing the incoming information.” Or, rather, the information that the incoming president will bring with him.
Trumponomics will define the real line
The Fed returns to the trenches after taking a break of great relaxation. In September, when the rate was lowered by half a point, it was not known who would be the winner at the polls. In November, when he pulled the trigger again, he already knew it. And he also knew about rising inflation on Wednesday when he completed the ride. From now on we are warned, the Fed returns to data dependence, and with exacerbated zeal. More than the specific figures, or the inertia of the recent past, what will mobilize it will be the policies promoted by Trump. Raising inflation projections for 2025 and 2026 is one way to prepare. The process of lowering rates has not ended, but is suspended until further notice. The new point map contemplates two cuts in 2025 and another two in 2026. But it is a tentative freehand drawing. Trumponomics will define the real stroke.
Wall Street was not pleased to learn of Powell’s withdrawal of collaboration. For this reason, the rate cut was not celebrated, and was a harsh punishment for stocks, bonds, currencies and commodities. The bull market is not in question, but the Christmas rally could be canceled despite having already bought the gifts (November retail sales were better than expected). Powell preferred to warn and give a reality check in time rather than a storm after the ship sails. It’s a message to the ship’s next captain rather than the passengers.
Source: Ambito
I am an author and journalist who has worked in the entertainment industry for over a decade. I currently work as a news editor at a major news website, and my focus is on covering the latest trends in entertainment. I also write occasional pieces for other outlets, and have authored two books about the entertainment industry.
