Prudential: Expects the Federal Reserve to pause interest rate cuts in January next year

According to the Zhitong Finance APP, Tom Porcelli, Chief U.S. Economist at PGIM Fixed Income, stated that given the "hawkish rate cut" in December, the Federal Reserve will pause rate cuts at the January meeting and will wait for more data to decide whether to resume or terminate this rate cut cycle. Powell's relatively hawkish stance caused the U.S. fixed income market to decline sharply. The market originally expected a 50 basis point rate cut in 2025, but after the press conference, the expected rate cut quickly dropped to 30 basis points. Due to the decrease in the expected rate cut magnitude, short-term rates fell by 10-15 basis points, while long-term rates decreased by 8 basis points, resulting in a noticeable flattening of the curve. Risk assets experienced significant volatility, with the stock market dropping by 3% and spreads on U.S. high-yield products widening.

He indicated that for the Federal Reserve, the outcome in 2024 is of greater concern than the beginning. On December 18, U.S. time, the Federal Reserve cut rates for the third consecutive time, lowering the federal funds rate target by 25 basis points to 4.35%. At the same time, as the year comes to a close, the Federal Open Market Committee (FOMC) also sent an unexpected signal—due to expectations that inflation and economic growth will rise in 2025, the pace of rate cuts next year will slow down. Therefore, the Federal Reserve hinted that it may only cut rates by 50 basis points again in 2025, which is half of the expected magnitude from September this year.

However, according to another market interpretation, the Federal Reserve raised its terminal rate to 3.1%, which is 75 basis points higher than the low point in 2021, indicating that the current policy stance is less restrictive than previously expected. Additionally, considering that one committee member held a different opinion and voted to maintain rates, along with inflation being more stubborn than expected and the unemployment rate slowly rising, Chairman Powell's "data-driven" approach will still be key to achieving consensus within the FOMC.

Although the Federal Reserve's adjustment of policy targets indicates that the labor market is weakening, PGIM has reason to believe that whether further rate cuts will occur depends on whether inflation continues to decline. Changes in the Summary of Economic Projections (SEP) seem to suggest that the Federal Reserve may change its policy to achieve its dual mandate of inflation and employment.

Chairman Powell pointed out that the labor market still faces challenges, such as declining hiring and turnover rates and slowing labor demand. However, given the stagnation in the anti-inflation process in recent months, inflation stickiness has once again become a focus of market attention. To this end, the Federal Reserve even raised its inflation forecast for 2025, increasing the core Personal Consumption Expenditures (PCE) price index growth from 2.2% to 2.5%, exceeding market expectations. Meanwhile, after two expected rate cuts in 2025, the median forecast for the federal funds rate is expected to reach 3.9% by the end of next year, up from the previous forecast of 3.4% three months ago.

Powell's response to the potential impact of tariffs fully reflects the Federal Reserve's concerns that inflation may still be above target. Although Powell did not completely deny this view, he could only avoid the issue due to the lack of specific data at present