WTI Posts Modest Gains To Near $69.50 As US Crude Stocks Fall

The Federal Reserve Open Market Committee (FOMC) cut the federal funds rate to the 4.25% to 4.50% range and announced it would continue its balance sheet runoff.

The Fed maintained its language on growth and inflation, stating “economic activity has continued to expand at a solid pace”, that the “labor market conditions have generally eased” and that “inflation has made progress toward the Committee’s 2 percent objective but remains somewhat elevated.”

On the future path of policy, the statement added more specificity that it is considering “the extent and timing” of additional adjustments to the target range. Seemingly setting up the possibility of a pause in interest rate cuts.

The Fed’s Summary of Economic Projections was updated from September:

The median projection for real GDP growth was upgraded to 2.5% in 2024, 2.1% in 2025, 2.0% in 2026, 1.9% in 2027, and 1.8% over the long run (from 2.0%, 2.0%, 2.0%, 2.0% and 1.8%).

The median unemployment rate forecast was upgraded slightly to 4.2% in 2024, 4.3% in 2025, 4.3% in 2026, 4.3% in 2027, and 4.2% over the long run (from 4.4%, 4.4%, 4.3%, 4.2%, and 4.1%).

On inflation, the median estimate for core PCE was raised to 2.8% in 2024, 2.5% in 2025, and 2.2% in 2026, and 2.0% in 2027 (from 2.6%, 2.2%, 2.0%, and 2.0%).

The median projection for cuts to the fed funds rate was reduced by 50 basis points over 2025 and 2026. This raised the level of the fed funds rate to 3.9% in 2025, 3.4% in 2026, 3.1% in 2027, and the long-run neutral rate was assumed to be 3.0% (from 3.4%, 2.9%, 2.9% and 2.9%).

President of the Cleveland Fed, Beth Hammack, voted against today’s decision, having preferred for the Fed to have paused at this meeting.

Key Implications

After confirming that the Fed followed through on its 25 bp cut, everyone immediately moved to see how the central bank’s view on future rate cuts shifted. No surprise, the Fed expects to be more cautious in 2025 than it forecast prior to the election of President Trump. It has removed 50 bps in cuts, while it has marked up its outlook for inflation. We’d also note that more members are aligned to the median view of 50 basis points in cuts than were aligned on 100 bps in September.

Market pricing agrees with the Fed’s more cautious approach, with an increasing likelihood that the Fed will have to pause rate cuts in January. While we don’t think investors should rule out a January cut completely, with the Fed’s preferred inflation rate stuck at 2.8% year-on-year, and expectations that President Trump will follow through on his inflationary political strategy, it makes sense that the Fed will be much more cautious come the New Year.

US Stocks Smashed After Hawkish Fed Cut – Nasdaq Down 3.5%

Greenback Surges Higher After Hawkish Fed

More Central Banks in Focus Today

Summary

As widely expected, the FOMC cut the target range for the federal funds rate by 25 bps at today’s meeting. However, one Committee member, who preferred to keep rates on hold, dissented.

The median dot for 2025 in the so-called “dot plot” was raised by 50 bps. In September, the median FOMC member looked for 100 bps of policy easing next year. The median forecast today looks for only 50 bps of rate cuts next year.

The wide dispersion in the dot plot for next year may reflect some uncertainty regarding the policy agenda that the incoming administration may pursue. Notably, the range of core PCE inflation forecasts for 2025 widened considerably.

Fed Cuts Rates but Forward Guidance Is Hawkish

As widely expected by market participants, the Federal Open Market Committee (FOMC) reduced its target range for the federal funds rate by 25 bps at its policy meeting today (Figure 1). The FOMC has now cut its target range by 100 bps from its peak of 5.25%-5.50% through moves of 50 bps in September, 25 bps in November and 25 bps today. Although the Committee eased policy today, we would characterize the decision as a “hawkish” rate cut.

For starters, Beth Hammack, the president of the Federal Reserve Bank of Cleveland, dissented today, voting to keep rates on hold instead. In that regard, Chair Powell noted in his post-meeting press conference that today was a “closer call” to cut rates by 25 bps than it was in November. Secondly, the Committee made a notable change to its post-meeting statement. The statement that was released following the last FOMC meeting on November 7 contained the following clause: “In considering additional adjustments to the target range for the federal funds rate…” This clause implied that the FOMC thought last month that it would continue to ease policy in coming months. That clause was changed to the following in today’s statement: “In considering the extent and timing (emphasis ours) of additional adjustments to the target range for the federal funds rate…” This rewording of the clause implies to us that the FOMC may now pause in the next meeting or two to ascertain how much additional policy easing may be appropriate.

The FOMC also released its quarterly Summary of Economic Projections (SEP) today. As we projected in our recent Flashlight report, the median forecast for real GDP growth in 2025 was revised a touch higher, the unemployment rate forecast for the end of next year edged down from 4.4% in the September SEP to 4.3% in today’s projections, while the core PCE inflation rate for 2025 was pushed up from 2.2% to 2.5%. Accordingly, the median dot in the so-called “dot plot” rose by 50 bps for 2025 (Figure 2). In September, the median FOMC member thought that a target range for the federal funds rate of 3.25%-3.50% would be appropriate at the end of 2025. The median FOMC member today now thinks that a range of 3.75%-4.00% will be appropriate. In other words, the median member now thinks that only 50 bps of additional easing next year will be warranted if conditions evolve as expected.

That said, the dots for next year are widely dispersed. The most dovish Committee member thinks that 125 bps of additional easing would be appropriate next year, while the most hawkish member sees no additional rate cuts from today’s level. This dispersion may reflect uncertainty surrounding the policy agenda that the incoming Trump administration may pursue in 2025. Notably, the range of forecasts among FOMC members for core PCE inflation, which the Fed believes is the best measure of the underlying rate of consumer price inflation, widened meaningfully for next year between September and December. The range for 2025 core PCE inflation in the September projection was 2.1% to 2.5%. The range in today’s SEP widened to 2.1% to 3.2%. Some FOMC members may be assuming that tariff hikes, should they go into effect, will raise inflation next year. (See the report we wrote in July for further discussion of the macroeconomic effects of tariffs.)

In sum, today’s FOMC meeting leads us to believe that, barring some dramatic unexpected development, the Committee likely will keep rates on hold at its next meeting on January 29. However, we believe the FOMC will continue to ease policy next year, albeit at a slower pace than over the past few months. Chair Powell seemed to support this expectation when he noted in his presser that the stance of monetary policy is “significantly closer to neutral” than it was previously, but that policy is “still meaningfully restrictive.”

Wall Street closed sharply lower on Wednesday, with the Dow falling over 1,100 points after the U.S. Federal Reserve delivered a rate cut as expected but signaled it will ease the pace of further cuts in the coming year.

For the Dow it was its tenth consecutive daily loss, marking its longest losing streak since 1974 and its biggest daily percentage decline since early August. The Nasdaq and S&P 500 also logged their largest one-day drops in months.

Benchmark Treasury yields moved higher on the news, and the dollar gained.

"Let's not forget, you tend to get knee-jerk reactions on Fed Day and then cooler heads prevail the next day," said Ryan Detrick, chief market strategist at Carson Group in Omaha. "The reality is still we have a strong economy and a Fed that is by no means looking to hike any time soon. There are still cuts, likely coming just a little later in 2025."

As expected, the Federal Open Market Committee (FOMC) cut the Fed funds target rate by 25 basis points at the conclusion of its final policy meeting of 2024.

But the central bank also reduced the number of projected rate cuts in the coming year. The policymakers now expect two interest rate cuts by the end of 2025, down from four in September, and set up the likelihood of a pause in January.

"The Fed didn't throw any curveballs, right? They cut as expected, and they're using language hinting at fewer cuts next year and into 2026," Detrick added. "The market was holding out hope that maybe there'd be a little more dovishness to the statement, but that wasn't the case."

In his subsequent press conference, Fed Chair Jerome Powell offered assurances that the economy is strong, inflation has come closer to the 2 percent goal, and monetary policy is well-positioned to deal with risks.

The Dow Jones Industrial Average fell 1,123.03 points, or 2.58 percent, to 42,326.87, the S&P 500 fell 178.57 points, or 2.95 percent, to 5,872.03 and the Nasdaq Composite fell 716.37 points, or 3.56 percent, to 19,392.69.

Earlier, European shares closed modestly higher, buoyed by technology stocks and French automaker Renault, but gains were held in check ahead of the Fed's rate decision.

MSCI's gauge of stocks across the globe fell 8.93 points, or 1.03 percent, to 855.09.

The STOXX 600 index rose 0.15 percent, while Europe's broad FTSEurofirst 300 index rose 2.56 points, or 0.13 percent.

Emerging market stocks fell 0.39 points, or 0.04 percent, to 1,092.81. MSCI's broadest index of Asia-Pacific shares outside Japan closed lower by 0.05 percent, to 579.42, while Japan's Nikkei fell 282.97 points, or 0.72 percent, to 39,081.71.

Yields for 10-year U.S. Treasuries gained after the Fed flagged the slower pace of easing.

The yield on benchmark U.S. 10-year notes rose 11.3 basis points to 4.498 percent, from 4.385 percent late on Tuesday.

The 30-year bond yield rose 7.3 basis points to 4.6525 percent from 4.579 percent late on Tuesday.

The 2-year note yield, which typically moves in step with interest rate expectations for the Federal Reserve, rose 10.5 basis points to 4.346 percent, from 4.241 percent late on Tuesday.

The dollar extended its gains against a basket of world currencies as investors digested the Fed's revised outlook.

The dollar index rose 1.09 percent to 108.09, with the euro down 1.13 percent at $1.037.

Against the Japanese yen, the dollar strengthened 0.76 percent to 154.63.

Bitcoin accelerated its losses after Powell said the Fed has no desire to hold the cryptocurrency amid debate over whether the incoming Trump administration might build a bitcoin reserve.

Bitcoin fell 5.17 percent to $100,916.00. Ethereum declined 6.14 percent to $3,692.50.

Oil prices settled higher in the wake of the Fed's decision.

U.S. crude rose 0.71 percent to settle at $70.58 per barrel, while Brent settled at $73.39 per barrel, up 0.27 percenton the day.

Gold fell in opposition to the greenback. Spot gold fell 1.94 percent to $2,594.24 an ounce. U.S. gold futures fell 2.05 percent to $2,590.20 an ounce. (Reuters)

Source: Koreatimes

25bp from the Fed, but less in 2025

The Federal Reserve has cut rates 25bp, as expected. This brings us to 100bp of cumulative cuts since September, but the Fed is indicating a much slower, more gradual series of rate cuts in the future. 50bp of cuts is now their baseline for 2025 based on the median of their individual forecast submissions, versus the 100bp that they were projecting in September. The change of view is on the back of higher inflation forecasts predominantly – the core PCE deflator is now expected to end 2025 at 2.5% rather than 2.2% as previously thought and isn’t expected to get down to 2% until 2027. It also has to be viewed in the context whereby the economy is still growing robustly, the jobs market cooling, but not collapsing and equity markets at all-time highs.

Federal Reserve forecasts versus September projections

Source: Federal Reserve, ING

Trump's plans for 2025 to determine how far the Fed can cut

50bp of policy rate cuts for 2025 was what the market was pricing ahead of time so reaction shouldn't have been that huge, but less confidence on inflation slowing sufficiently and the fact we had one FOMC member dissenting – Cleveland Fed President Hammack preferring no change – means markets aren’t fully pricing another cut until July with only 35bp now priced for 2025 in total. January’s FOMC is almost certainly going to see the Fed hold rates steady, but we will have a much clearer understanding of President-elect Trump's tariff, tax and spending intentions at the March FOMC meeting.

The Fed has previously suggested that they are not going to pre-empt those proposals and only take them into account when they are implemented. Nonetheless, given his policy thrust of immigration controls and tariffs, which could result in higher inflation, plus cuts to regulation and tax cuts designed to juice growth, we expected the Fed signals a shallower, slower path of easing through 2025. Ahead of time we were forecasting three 25bp rate cuts next year rather than the two 25bp the Fed suggest, but there is a huge amount of uncertainty given a lack of clarity on how far and how fast President Trump will go on policy, plus how quickly the jobs market is actually cooling and what this means for inflation. As such, we will keep our forecasts unchanged for now,

The recalibrated market discount for the funds rate exposes the 10yr rate as still too low here

The 25bp cut itself was expected, but the big news is the larger-than-expected upward shift in the dot plot. The Fed now pitches the funds rate at 3.875% next year. That’s up 50bp from what they had before. In fairness though, the market’s discount had changed dramatically too in the past couple of months. Still, the market reaction is higher rates along the curve. Looking at the 2yr now at over 4.3%, it’s likely overreacted to the upside. While the 10yr rate is back to the 4.45%, back to where it was just post the Trump re-election. Little reason for this to collapse back lower based on what we know.

Noteworthy here is the upside shift in the market expectation for the effective fund rate for end-2025. This is now up to almost 4%. In other words the market is questioning whether the Fed delivers a final 25bp cut to get the funds rate below 4%. That pitches the implied “floor” for longer tenor rates at or about 4% (or just under). Contrast against that where the 10yr SOFR rate is now, at 3.95%. That’s essentially flat to the expected landing area for the funds rate. Something is mis-priced here. Either the Fed is going to cut by more than that. Or, and more likely, longer tenor rates are too low. As a call for 2025, we still see 4.5% for 10yr SOFR and 5%+ for the 10yr Treasury yields as viable targets.

The Fed also made an important technical adjustment to the overnight reverse repo rate (cut by 30bp), and now flat to the new Fed funds floor at 4.25% (cut by 25bp). This was broadly anticipated. It reduces the compensation obtainable at the reverse repo window, and should prompt less use of that window at the margin. Having a 5bp cushion made sense when the funds rate floor was a zero (to prevent a zero print). Now there is no cushion, but also no need for one. The effective funds rate should not be impacted in the sense that it should remain c.8bp above the floor. Although there can by a mild bias lower if anything.

Fed fires up the next leg of the dollar rally

Instead of quietly slipping into year-end, FX markets have been given a wake up call today that the Fed is looking at a higher inflation and interest rate profile over a multi-year horizon. Short-dated US swap rates have jumped 8bp on the news and pushed dollar rate differentials close to the widest levels of the year.

While a stronger dollar is very much a consensus (and our own view) for 2025, today’s bearish flattening of the US curve – telling us the Fed will not be providing as much monetary stimulus as first thought – is a clearly bullish factor for the dollar. It is also a bearish factor for the more pro-cyclical currencies in Europe and Asia and will weigh on commodity currencies – already under pressure on faltering Chinese growth and the prospect of Donald Trump’s trade agenda.

Expect EUR/USD to continue defying seasonal buying pressure – and we think 1.02/1.03 is possible over coming weeks. USD/JPY risks surging through 155 – although today’s hawkish Fed event makes it a little more likely that the Bank of Japan surprises with a rate hike tomorrow. And as above the commodity complex should stay under pressure. This is especially so for the Canadian dollar, which now has domestic turmoil to deal with as well.

Today’s event risk is going to prove a further headache for the People’s Bank of China as they try to hold onshore USD/CNY below 7.30 – even though USD/CNH can push well above that level. And bearish flattening of the US curve is bearish for most emerging currencies and especially the Brazilian real – which is off another 2% today. This heaps pressure on the Lula administration to deliver much needed fiscal consolidation – it cannot solely depend on the local central bank to save the real.

Historical Context

Economic Indicators and Their Impact

Trading Strategies

Conclusion