Traders trim bets for December rate cut on Fed chief Powell’s caution

WASHINGTON - Traders pared back their expectations for an interest rate cut in December after US Federal Reserve chairman Jerome Powell said economic resilience gives officials room to ease more carefully.

Swaps traders lowered the chance to less than 60 per cent that the central bank reduces rates at its two-day gathering that wraps on Dec 18 – from roughly 80 per cent a day earlier. 

Mr Powell said the recent performance of the US economy has been “remarkably good”, giving the Fed room to lower interest rates at a careful pace.

He said the US economy was not sending signals that policymakers need to be in a hurry to lower rates, though he made no comments on the possibility of a cut at the December meeting.

“Going a little slower – if the data lets us go a little slower – seems like a smart thing to do,” Mr Powell said during the question and answer portion of the event.

Traders have been recalibrating their bets for the Fed’s next rate reduction in recent days, boosting the chances of a December move after US October consumer inflation data came in and was in line with expectations. 

While the swaps market still favours a December reduction for now, the outlook gets murkier for 2025.

In the wake of Donald Trump’s presidential victory last week – and the Fed’s latest quarter-point cut – economists across Wall Street have also dialled back their forecasts for the rate path in 2025.

JPMorgan Chase & Co chief US economist Michael Feroli said Mr Powell’s remarks could hint at a slower pace of rate cuts even sooner than March. 

“We still think the FOMC (Federal Open Market Committee) is likely to cut in December,” he wrote. But “today’s speech opens the door to dialling down the pace of easing as soon as January”.

“We are on the verge of a pause,” said Stifel Financial Corp chief economist Lindsey Piegza. “Clearly the Fed has taken out more policy firming than needed at this point.”

Mr Piegza forecasts a pause by January and then just three cuts in 2025 “at most”.

TD Securities head of interest rate strategy Gennadiy Goldberg said: “Powell’s remarks open the door for a slowing in the pace of rate cuts, which could leave rates higher for longer than investors expect.”

US central bankers began lowering borrowing costs in September with an aggressive half percentage point cut, and then lowered the policy rate again by a quarter point last week.

They have signalled a willingness to cut rates further, so long as inflation continues to slow.

Mr Powell’s comments appear in line with those of some of his colleagues, who are advocating a go-slow approach to future rate reductions.

Data out earlier this week showed a measure of underlying US inflation remained firm in October. The so-called core consumer price index – which excludes food and energy costs – increased 0.3 per cent for a third month.

“Inflation is running much closer to our 2 per cent longer-run goal, but it is not there yet,” Mr Powell said. “We are committed to finishing the job. With labour market conditions in rough balance and inflation expectations well anchored, I expect inflation to continue to come down towards our 2 per cent objective, albeit on a sometimes-bumpy path.”

Monetary policy could face crosswinds next year if President-elect Trump fulfils his campaign promises to cut taxes, restrain immigration and deploy tariffs.

Policy uncertainty may also be contributing to the Fed’s more inertial attitude towards lowering rates right now.

Trump policies

In the Q&A session, Mr Powell repeated his previous comments that it is too early for policymakers to shift in anticipation of new fiscal or trade policies. “I think we have time to make assessments about what the net effects of policy changes will be on the economy before we react,” he said.

He emphasised that when it comes to potential new tariffs, the reaction of US trading partners will complicate the impact on the US, and the negative effect on growth could run counter to the positive impact of fiscal policy.

“Another thing is: What about retaliation?” he said. “In addition, that’s happening at a time when there could be fiscal policy which could be supportive of the economy. So what’s really the net effect?”

Trump has also criticised the Fed and Mr Powell.

At his Nov 7 press conference, Mr Powell said he would not leave the Fed if asked to resign.

He also added that any attempt to demote him or any other Fed governor in a leadership position was “not permitted under the law”. BLOOMBERG