FOMC Minutes Preview: The One Where Powell Flip-Flopped After Trump Won

By Newsquawk

PREVIEW

The December Fed meeting saw the Fed cut by 25bps as expected and signal a slowdown of easing ahead through changing the language in the statement and by lifting the 2025 dot plot to suggest just two rate cuts this year. Within the presser Fed Chair Powell said that it was a close call, albeit the right call, and we will look to the minutes to see the discussions among the FOMC for keeping rates on hold in December – Hammack was the sole voting dissenter, but the dot plot suggests there were at least four members who wanted to keep rates on hold. The minutes will also be used to gauge the prospects for easing ahead and what will be required, but several Fed speakers since have said the Fed can afford to be cautious with rate cuts due to sticky inflation and a resilient labor market. Powell also stated that policy is well positioned to deal with risks and uncertainties, noting if the economy remains strong and inflation does not continue to move sustainably toward 2%, they can dial back policy restraint more slowly. However, if the labor market were to weaken unexpectedly, or inflation were to fall more quickly than anticipated, the Fed can ease more quickly.

Given the hawkish developments, the minutes are expected to maintain this tone but it will likely stress that the Fed will make decisions based on how the data unfolds. Discussions around the neutral rate, inflation persistence, growth and the labor market will be eyed, as well as potential impacts of upcoming government policy changes.

Analysts at Citi note the minutes will include discussion of concerns that inflation could remain persistently elevated if the policy rate does not remain restrictive enough, adding there could be some discussion of the idea that the neutral rate of interest has moved higher and policy rates are closer to neutral than previously thought. Note, the latest dot plot saw the longer run median dot shift up to 3.0% from 2.9%, with the range of views between 2.375-3.875%. It will also be interesting to see if there was much discussion about the impact of upcoming policy changes with Trump becoming President. Powell had highlighted that some incorporated policy changes into their projections, but others did not. Citi points out that the minutes will likely discuss upside risks to growth and inflation that some Fed officials are attributing to potential new government policy.

The desk writes that the “Minutes may specifically discuss tariffs as an upside risk to inflation, although we would expect at least “some” to see this as a one-time price level effect that would not necessarily imply tighter monetary policy.” Elsewhere, Citi highlights that “most” will continue to characterize the labour market as “solid”, although some will likely note that it is still “very gradually” softening. The desk notes there should also be some discussion of remaining vigilant regarding a sharper weakening in labor markets.

Looking ahead, market pricing is currently more hawkish than the Fed median view of two rate cuts this year, currently pricing in ~39bps of easing, which implies between one or two rate cuts this year.

DECEMBER MEETING RECAP

Statement and SEPs: At its December meeting, the Fed cut rates by 25bps to 4.25-4.5%, as expected. The vote was split 11-1, with Hammack voting to leave rates unchanged. The statement was little changed from the November meeting but added that in considering the “extent and timing” of additional rate adjustments (prev. In considering additional adjustments), the Committee will assess incoming data, evolving outlook and balance of risks, signalling a slowing of easing ahead. A further hawkish skew came in the updated SEPs, where the median dot plot for 2025 and 2026 FFR forecasts were lifted above expectations. Recapping: the median 2025 and 2026 dot rose to 3.9% (prev. 3.4%, exp. 3.6%) and 3.4% (exp. 3.1%, prev. 2.9%), respectively, while the 2027 and longer run median dot plots rose to 3.1% (prev. 2.9%) and 3.0% (prev. 2.9%). As such, the 2025 median dot plot signals just two 25bps cuts in 2025; but the FOMC were more aligned this time round – four members see rates above the median, and five see rates below, but ten were in line with the median. Elsewhere, Core PCE inflation is now seen at 2.5% for 2025 (exp. 2.3%, prev. 2.2%) and 2.2% for 2026 (exp. 2.0%, prev. 2.0%). Forecasts for the unemployment rate were largely as expected, seen at 4.3% throughout the forecast horizon, ex-longer run, which is seen at 4.2%.

Press Conference: Chair Powell stated that the Fed is squarely focused on its dual-mandate, and that the economy is strong, with the labour market solid, and inflation much closer to its 2% goal. Powell added that the policy stance is now significantly less restrictive, and going forward the Fed can be more cautious. In his Q&A, the Fed Chair said that the decision was a “closer call”, but the “right call”, suggesting there was a discussion surrounding holding rates at the meeting. Powell added that risks were two-sided, and officials were trying to steer between those two risks. On the statement change, he said that “extent and timing language” shows the Fed is at or near the point of slowing rate cuts, and the slower pace of cuts reflects that expectation. He also said that cuts that are made in 2025 will be in response to data and, as long as the labour market and economy are solid, officials can be cautious as they consider further cuts. Additionally, looking to US Presidentelect Trump’s term, Powell said some people did take a very preliminary step and incorporated conditional effects of coming policies into their projections. Looking ahead, the Fed chief said the Committee will be looking for further progress in inflation to make cuts, and added that from here is a new phase, and the Fed is going to be cautious about further cuts. After the meeting, Goldman Sachs said despite the hawkish message from the dots, they kept their more dovish baseline forecast of three more cuts in March, June, and September 2025 unchanged, though added a bit more probability weight in their Fed scenario analysis to an outcome with a higher terminal rate.