The Fed’s December Statement

Estimated reading time: 4 minutes

Hawkin’ Around the Christmas Tree

The last Federal Reserve meeting of 2024 is now behind us, and the 25 basis point (bp) rate cut at this meeting brought the full year 2024 reduction in rates to 100 bps, with the fed funds target range now at 4.25%-4.50%.

The rate move itself was widely expected by markets, yet after the meeting and during the press conference with Fed Chairman Jerome Powell, broad stock market indices fell 2%-4% and benchmark Treasury yields rose 10-15 bps. In fact, this was the largest move in the 10-year Treasury yield on a Fed day since January 2022. 

It wasn’t the rate cut that moved markets, it was the dot plot and the summary of economic projections, both of which came across hawkish. Combining those outputs with the commentary from Powell resulted in this Fed statement scoring as the most hawkish since January 2024.

For most of 2024, investors seemed comfortable with the fact that we weren’t going to see as many rate cuts as we thought at the beginning of the year. Economic data remained strong, solid earnings growth buoyed stocks and it appeared as if a higher for longer policy rate was acceptable. Today’s action suggests this may be an uncomfortable position after all.

Inflation Trend Not Their Friend

A while back we wrote about inflation data being demoted as far as what investors were most concerned with. This meeting made it clear that inflation data should still be on investors’ minds, as the Fed’s projections of inflation for 2025 are now higher than they were before. Moreover, the long-run projection for the fed funds rate moved up to 3.0% from 2.9%, driving markets to price in a higher neutral rate than originally thought.

Chairman Powell himself admitted that today’s rate cut was a “closer call” and we also uncovered that four members of the Federal Open Market Committee were against a cut. Unanimous decisions may be a thing of the past for a while, which raises uncertainty and markets are clearly struggling to set clear expectations.

Rates Don’t Matter… Until They Do

Despite a year of volatile Treasury yields, stocks didn’t seem to mind too much until the 10-year moved back up to 4.5%, and that happened again today. But it’s not just that yields moved up dramatically today, it’s the expectation that rates might not be coming down anytime soon and any new debt issued by the Treasury will be issued at higher yields than might be palatable for markets.

This meeting feels like one we’ll be talking about for some time as a message that was largely unwelcomed by markets. Time will tell if this is a short-term bump in the road or one that starts a cycle of uncertainty and nerves, but it’s clear that in order to get more rate cuts, we need to keep our eyes on inflation. 

As we close out 2024 and begin 2025 with a new administration in Washington, one that’s expected to change trade policy and reduce fiscal spending, the crosscurrents for the Fed are many. Powell’s job is getting harder, as is the market’s job of interpreting the future path of monetary policy. 

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