Fed to deliver 25bp cut but signal more hawkish 2025

The inflation report for November came out exactly as expected. Most notable was that the monthly number printed at 0.3% for the fourth consecutive month, consistent with an annualised rate just below 4%. This will undoubtedly be a concern for FOMC officials, and will raise anxiety levels among the committee that progress on bringing down US inflation has stalled.

While we expect the Fed to cut rates by 25 basis points this week, we expect the forward guidance to move in a hawkish direction.

Chair Powell will likely continue to stress that US growth remains strong, and that the labour market continues to add jobs at a solid pace, despite the miss in the October payrolls report.

The key to the USD reaction will likely be how many cuts are indicated in the dot plot of rate projections. Futures markets are currently pricing in three rate reductions in 2025, but we think that it may be a struggle for the Fed to justify more than two.