'Hawkish' Powell on Rising Inflation: "Cautious on Additional Rate Cuts"…Two Cuts Expected Next Year

US Fed Cuts Interest Rate by 0.25%P
Number of Rate Cuts Expected Next Year Reduced from 4 to 2
Powell: "Monetary Policy Less Restrictive... Will Move Slowly"
Additional Cuts Will "Consider Inflation Progress"

"With this measure, the policy rate has fallen by 1 percentage point from its peak, and now monetary policy has become significantly less restrictive. We can be more cautious while considering additional policy rate adjustments."

Yonhap News

Jerome Powell, Chair of the U.S. Federal Reserve (Fed), reaffirmed his intention to slow the pace of interest rate cuts next year. The Fed lowered rates for the third consecutive time on this day, significantly reducing the expected number of rate cuts next year from four to two. Powell's indication that the rate cuts were 'hawkish cuts' led to a broad decline in the New York stock market and a sharp rise in Treasury yields.

At a press conference held immediately after the final Federal Open Market Committee (FOMC) meeting of the year on the 18th (local time), Powell said, "It was a closer call, but today's decision was the right one," and stated that the Fed could take a more cautious stance on future rate cuts.

At this meeting, the Fed decided to lower the federal funds rate from 4.5?4.75% to 4.25?4.5%. After cutting rates by 0.5 percentage points from 5.25?5.5% in September for the first time in two and a half years, the Fed lowered rates by an additional 0.25 percentage points in November and this month, marking three consecutive cuts. However, among the 19 Fed officials participating in the FOMC meeting, four argued that this rate cut was unnecessary under "appropriate monetary policy," showing differing views.

Regarding the series of monetary easing measures, Powell said, "We moved very quickly to get here," and added, "Going forward, I expect we will move more slowly." This statement reiterated that the Fed would slow the pace of rate cuts after initiating the easing cycle in September.

The key point of this FOMC was also the dot plot, which provides insight into future monetary policy. In the dot plot released on this day, the Fed sharply reduced the expected number of rate cuts in 2025 from four cuts of 0.25 percentage points each to two cuts of 0.25 percentage points each. The robust U.S. economy was the background for this adjustment in rate cut expectations. In the Summary of Economic Projections (SEP) released simultaneously, the Fed projected this year's core Personal Consumption Expenditures (PCE) price index at 2.8% and Gross Domestic Product (GDP) growth at 2.5%, upward revisions of 0.2 and 0.5 percentage points, respectively. The year-end unemployment rate forecast was lowered from 4.4% to 4.2%.

Regarding the downward revision of expected rate cuts next year, Powell explained, "Inflation has recently risen," and said, "Fed officials will consider inflation progress when reviewing additional rate cuts."

He assessed the current U.S. economy by saying, "We believe the economy is in a really good place," and "Policy is also in a very good place."

As the Fed announced the rate cut decision along with the dot plot and SEP, Powell explained that some Fed officials reflected the economic policy impact of President-elect Donald Trump, who will take office in January next year. There are concerns about 'Trumflation,' where Trump's policies such as tariff increases and illegal immigration bans could push prices higher. However, Powell said regarding the policy impact of the second Trump administration, "We need to take our time and evaluate very carefully without rushing," adding, "We can only assess after seeing how policies are actually implemented, and we have not yet reached that stage."

As the Fed implemented a hawkish rate cut, the New York stock market declined broadly. On this day at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average closed down 2.58% from the previous trading day. The large-cap S&P 500 index fell 2.95%, and the tech-heavy Nasdaq index plunged 3.56% to close the session. Treasury yields surged.

The U.S. 10-year Treasury yield, a global benchmark for bond yields, rose 13 basis points (1bp = 0.01 percentage points) to 4.51% compared to the previous trading day, while the 2-year Treasury yield, sensitive to monetary policy, moved up 10 basis points to 4.34%.

Jan McIntyre, portfolio manager at Brandywine Global, said, "The actual rate cut was the least important factor at the December FOMC meeting and had already been priced into the market," adding, "The Fed did not disappoint as expected, and considering the forward guidance, today's decision was a 'hawkish cut.'"

David Russell, Chief Global Market Strategist at TradeStation, analyzed, "There was no Christmas cheer from the Fed," and said, "Policymakers had no reason to be dovish given expectations of higher inflation and lower unemployment this year." He added, "Since rates are no longer clearly restrictive, it is a logical time to pause rate cuts."