A Case for a Hawkish Fed Rate Cut Decision

Odds Favor a Hawkish Fed Rate Cut 

While attention is on the December 18 FOMC decision, where a 25bps rate cut is widely expected, the focus should quickly shift to looking ahead. This is especially true if the Fed decision is viewed as a hawkish rate cut.

Current odds for a 25bps rate cdut: 86/14 (source; CME Fedwatch)

What is a hawkish rate cut?

A hawkish rate cut refers to a central bank, such as the Fed, cutting interest rates but then giving hints that it might temporarily pause.The next FOMC meeting is scheduled for January 29, 2025.

The case for a pause is as follows:

• Sticky inflation
• A relatively strong economy
• Uncertainty over the Trump administration’s economic policies and the potential impact on inflation (i.e. from tax cuts and tariffs).

Why is this important?

Markets often trade on expectations and should the Fed decision be interpreted as a hawkish rate cut, it would have implications for other markets, especially forex and the dollar.

In this regard, keep an eye of the quarterly “dot plot” as part of its Summary of Economic Projections at its December, March, June, and September meetings.

Looking ahead

This is for a further discussion but should the Fed pause in January, it could setup a confrontation between President Trump and his pro-growth agenda, and Fed Chair Powell, who has gone out of his way to emphasize the independence of the Fed. Just something for your blotter,

In the meantime, keep an eye economic data, especially Wednesday’s CPI release, as it will influence whether expectations are for a rate cut and then a pause.

Check out Incoming Data in Our Economic Calendar – HERE

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