After today’s rate cut, is the Fed ready to pause?

After today’s rate cut, is the Fed ready to pause?

 

• Chair Powell and the FOMC had their final meeting of the year today and announced a 0.25 percentage point cut to the overnight borrowing rate. In addition to the rate announcement, Chair Powell provided guidance to the Fed’s interest rate path moving forward. He stated that the Fed now expects two rate cuts in the next year which was an appreciable downward adjustment from prior expectations of four potential cuts. The markets were not receptive of this news and sold off.

 

• It is largely believed that the Fed made the additional cut because of the cooling labor market – while layoffs are not increasing, neither is hiring. The unemployment rate began the year at 3.7% and has slowly increased over the year to 4.2%. The rate cut comes despite the prolonged battle against inflation, and growing fears that Trump policies could be inflationary. Last week, the most popular inflation readings, CPI and PPI, released their monthly figures for November. The Consumer Price Index (CPI) largely met expectations, but the core CPI figure continues to hover above the 3% mark. The Producers Price Index (PPI) posted a 3% annual increase, the largest annual increase since February 2023. With several inflation readings remaining appreciably above the Fed’s target of 2%, the argument for continued appreciable rate cuts is becoming more tenuous.

 

• A number of important economic releases occur this week and they will have a significant impact as we enter 2025. Manufacturing data released on Monday signaled that U.S. factories are experiencing their highest level of activity in nearly three years. Tuesday, U.S. Retail had a month over month gain that beat expectations and showed the resiliency of the U.S. consumer. Today, Wednesday, housing data released was a mixed bag with a decline in housing starts but a significant increase in single family housing starts and building permits. On Thursday, additional housing data will be released along with jobless claims. Finally on Friday, to cap off the week, the Fed’s preferred inflation gauge, the personal consumption expenditure (PCE) figure will be released. Expectations are that it will indicate a 2.8% annual increase in prices for November, an appreciable increase over October’s annual reading of 2.3%.