Pause for Powell

Thought for Thrusday

“When you see only problems, you’re not seeing clearly.”

― Phil Knight, Shoe Dog: A Memoir by the Creator of Nike

Pause for Powell?

Yesterday evening, the Federal Reserve met market expectations in keeping rates unchanged, marking a pause in their loosening cycle in the wake of three recent cuts. Subsequent rhetoric from Powell telegraphed that the Central Bank are now adopting a “wait and see” approach, indicative of how policy makers will be continuing to weigh up economic and political influences.

The hold keeps the Fed’s benchmark rate at the 4.25%-4.5% target range, one percentage point below the highs experienced over the summer when borrowing costs were at their highest level in 22 years.

The decision comes against an inflationary backdrop which has seen US CPI rise incrementally from September’s recent lows of 2.4% to December’s level of 2.9%. US growth has also remained robust, with quarterly growth rising to 3.1% over Q3, giving policy makers more room to maintain restrictive conditions and less pressure to cut rates. Such a hawkish stance may be contrasted to the ECB, whose stagnant growth has resulted in a more dovish monetary policy.

Indeed, Powell said that the US economy was in a “good place” with such comments coming after the Federal Reserve upwardly revised growth forecasts for the end of 2024 and 2025 in December. In light of recent economic indicators, the FOMC said that they will “carefully assess incoming data, the evolving outlook, and the balance of risks.”

Its important to note however, that the Fed’s decision also comes against political backdrop, which has seen market participants continue to consider how legislative agendas (most notably from Trump and a Republican dominated Congress) could impact the US economy and with it, the country’s inflationary pathway.

For example, one organisation – Yale’s The Budget Lab – which labels itself a non-partisan policy research centre calculated that these tariffs could “initially raise the level of consumer prices by 1.2% to 5.1%.” They continued by saying that “this represents 7 to 31 months of normal inflation under the Federal Reserve’s target, and between a tenth and a third of the price level increase experienced over 2020-2023.”

Such uncertainty no doubt led Powell to suggest that “It’s a very large economy and policies affect it at the margin. But, we’re going to wait and see.”

The interest rate decision also follows the FOMC December meeting which gave markets further forward guidance given that it involved the release of the Fed’s Dot Plot. Here, policy makers expected to see just 50bps worth of cuts over 2025, which itself was a sharp reduction from their last dot plot where they forecast 100bps of cuts for 2025, indicative of how policy makers now see rates being held higher for longer. This trend of less aggressive monetary loosening also provides markets with greater conviction that the neutral rate of interest will likely be higher in the near to mid-term.?

Frankfurt Expected to Conduct Fifth Cut

This afternoon, the ECB are expected conduct their fifth rate cut in the present cycle, with markets fully pricing in a 25bps rate cut.