Fed Policy Note Reveals Reason for Reduced Rate Cut Projection
The central bank’s revised inflation outlook also backs our recent downgrade of this holding.
You've reached your free article limit
You've read 0 of 1 free Pro articles.
The Fed, as widely expected, delivered another 25 basis point rate cut exiting its December policy meeting, bringing the total number of rate cuts in the last four months to 100 basis points.
Examining the policy note, we see a modest tweak in its verbiage to, “In considering the extent and timing of additional adjustments to the target range for the federal funds rate…” That language, measured against the latest 3.1% Q4 2024 figure for the Atlanta Fed’s GDPNow model and recent inflation data, explains why the Fed’s updated set of economic projections shows just two rate cuts next year, down from the four it telegraphed back in September.
As we called for, the updated forecasts also show a much stronger level of GDP for this year (2.5% versus 2.0% previously), and a longer timetable for inflation to reach the Fed’s 2% target. Consistent with that slower burn-off, the Fed now sees rate cuts continuing into 2027. That still backs our view that 2026 should be a vibrant year for construction activity as cumulative rate cuts translate into lower borrowing costs.
Ahead of Fed Chair Powell’s presser comments, we would say what we’ve seen so far matches what we expected to see. The one aspect of the Fed’s forecast that does stand out to us is the step up in the Fed’s outlook for PCE inflation in 2025, even though it sees core PCE inflation moving lower in 2025. Because core excludes food, this suggests to us that the Fed is seeing the same thing we have in data like the FAO Food Price Index. As such, we see this different outlook in the Fed's latest projections affirming our decision to downgrade PEP shares to a Four rating and our plan to unwind their place in the Portfolio.
Now for Powell’s press comments…
More Pro Portfolio
- 5 Buys We're Making Following a 'Sigh of Relief' November CPI Report
- Weekly Roundup: Dueling Factors Lead to Mixed Results Ahead of the Fed
- The Cost of Living, the Cost of Aging: Headlines That Speak to Our Portfolio
At the time of publication, TheStreet Pro Portfolio was long PEP.
