Powell: "US Economy is Strongest, No Signal to Rush Rate Cuts"... Was He Concerned About Trumplation?

Powell "US Economy is the Best Worldwide"
Inflation Shows "Broad" Progress...Employment Rated as "Balanced"
Suggests Cautious Monetary Easing...US 2-Year Treasury Yield Rises
December Small Cut Expected...Morning 80% → Afternoon 60%

Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), signaled that the pace of monetary easing could slow down as the U.S. economy remains strong. This is because inflation is slowing and the labor market is more resilient than expected, reducing the urgency for interest rate cuts. The possibility of "Trumflation" (price increases caused by Trump’s policies) during the implementation of President-elect Donald Trump’s tariff hikes and tax cut promises, starting in January next year, may also be considered a factor for slowing the pace of rate cuts.

On the 14th (local time), Powell attended an event in Dallas and stated, "The economy is not sending any signals that we need to rush rate cuts." He emphasized, "The U.S. economy is by far the strongest among major economies worldwide," adding, "The strong economy we are currently seeing gives us the ability to make decisions carefully."

Powell noted that inflation has "broadly" progressed and employment is holding up well. He said, "Inflation has not yet reached the long-term target of 2%, so we will remain committed to finishing our job," but also added, "The labor market is roughly balanced, and inflation expectations are well anchored, so although it will be challenging, we expect the inflation rate to continue to decline toward the 2% target."

Earlier, the Fed began a monetary easing cycle in September after two years and six months of rate hikes, lowering the rate by 0.5 percentage points from the previous 5.25-5.5%. Then, at the November Federal Open Market Committee (FOMC) regular meeting held on the 7th, the rate was cut again by 0.25 percentage points. Although rates were lowered twice consecutively, the size of the cuts decreased. Regarding the December rate decision, Powell did not specify a clear direction and left various possibilities open.

With Powell expressing on this day that he would not rush rate cuts, Wall Street’s expectations for a Fed rate cut next month have rapidly diminished. According to the Chicago Mercantile Exchange (CME) FedWatch, the federal funds futures market reflected a 62.1% probability that the Fed would cut rates by 0.25 percentage points at the December FOMC meeting. Earlier that morning, the probability hovered around 80%, but after Powell’s remarks, it dropped to the low 60% range. As market expectations for rate cuts retreat, U.S. Treasury yields are rising, especially in the short-term segment. The 2-year Treasury yield, which is sensitive to monetary policy, is currently trading at 4.34%, up 5 basis points (1bp = 0.01 percentage points) from the previous trading day.

Quincy Crosby, Chief Global Strategist at LPL Financial, evaluated, "It was expected that the final stage of price stabilization could be challenging, but Powell reminded us again that the Fed will not implement the series of rate cuts the market wants unless the labor market deteriorates."

There is also speculation that the possibility of Trumflation could cause the Fed to slow the pace of rate cuts. The market is gaining strength in the view that inflation could rise again once President-elect Trump, who has repeatedly mentioned dismissing Powell, takes office in January next year. Analysts believe that Trump’s promised tariff hikes and illegal immigration restrictions will push prices up. His tax cut policies, including reductions in income and corporate taxes, are also expected to lead to increased fiscal deficits, higher government bond issuance, and rising issuance yields, keeping market interest rates at high levels. This is why some expect the Fed’s monetary easing pace to slow down more significantly after next year rather than in December. Loretta Mester, former President of the Federal Reserve Bank of Cleveland, also predicted on the 12th that the number of rate cuts by the Fed next year would be fewer than the four cuts forecasted in the September dot plot due to Trump’s tariff hike promises and other policies.