BY: Matthew Kimbrough
Portfolio Manager
Setting the Stage for 2025
On December 18, 2024, at the conclusion of the previous FOMC meeting, the Fed announced a reduction of the Fed Funds rate by another 25 basis points. This was the third rate cut in a row, bringing the total amount of rate cuts in 2024 up to 100bp (note, this was exactly what September’s SEP had projected for the remainder of the year). The revised SEP that was released in December suggested a reduction in the pace of rate cuts for 2025 (from 100bp to a mere 50bp). Fast-forwarding to today, this is precisely what the Fed Funds futures market is currently projecting for the remainder of this year. So, given the Fed’s policy action in December and the expectation of a reduction in the pace of monetary policy activity, no adjustments to the Fed Funds range are expected at the conclusion of today’s meeting.
Despite the degree of certainty surrounding today’s policy actions, a new degree of uncertainty exists surrounding the U.S. economic outlook. On the one hand, the U.S. economy appears to be chugging along just fine – yes, inflation is proving stickier than expected, with Core PCE hovering at around 2.8% instead of moving further towards the Fed’s 2% objective, but U.S. GDP is likely to wind up higher than expected in 2024, and unemployment actually ticked down to 4.1% in the December reading. However, with a new administration taking the reins, fiscal policy activity is likely to play a significant role in the economic outcome for 2025. The effects of President Trump’s efforts to either levy tariffs or use them as bargaining tools with foreign powers, while simultaneously “streamlining” governmental agencies internally, remain to be seen. Meanwhile, investors seem to be focusing more on equity market themes such as earnings announcements for Magnificent 7 technology companies and the drama unfolding between NVIDIA and China’s new AI superstar, DeepSeek.
Today, we don’t expect much out of the decision itself or changes to the official statement, but we will look towards Powell’s press conference for indications of potential hawkish sentiment.
The Decision
At the conclusion of today’s FOMC meeting, the Fed Funds rate was held steady, as expected, maintaining the current range at 4.25–4.50%. It was a unanimous decision.
The Statement
This meeting’s Statement contained several amendments that are highlighted in the below chart.
The Press Conference
In his pre-prepared opening statement, Fed Chair Powell stated, “With our policy stance significantly less restrictive than it had been, and the economy remaining strong, we do not need to be in a hurry to adjust our policy stance.”
The very first question dealt with potential conflicts between a U.S. President who has stated that he is eager for rates to drop. Powell commented, “I’m not going to have any response or comment whatsoever on what the President has said. It wouldn’t be appropriate for me to do so. The public should be confident that we will continue to do our work as we always have, focusing on using our tools to achieve our goals, keeping our heads down and doing our work. That’s how we best serve the public.”
On tariffs and the potential for higher inflation, Powell remarked, “The Committee is waiting to see what policies are enacted. We don’t know what will happen with tariffs, with immigration, with fiscal policy, and with regulatory policy. We need to let those policies be articulated before we can begin to make a plausible assessment of what their implications for the economy will be.”
One reporter read a statement that Powell made several years ago about the need for successful organizations to have policies involving diversity and inclusion, and asked if he still believed that. Powell said “yes,” but he also read a very carefully crafted reply, given President Trump’s recent executive orders related to the same topic. “We are reviewing the orders and the associated details as they are made available, and as has been our practice over many administrations, we are working to align our policies with executive orders as appropriate and consistent with applicable law.”
When asked – How far do you think you are from neutral? – Powell replied, “You can’t know with any precision, but as I like to say, you know the neutral rate by its works. I think at 4.3%, we are above every committee member’s estimate of longer-run neutral. Our eyes are telling us that our policy is having its effect on the economy. We see that it is having meaningful effects in bringing inflation under control. It has helped to bring the labor market into balance as well. I would say that we’re meaningfully above it, but I have no illusion that anyone knows precisely what that amount is.”
The Market Reaction
Treasury yields were up around 5bp after the statement was released, but this increase became more muted during Fed Chair Powell’s press conference.
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