The Federal Reserve (Fed) had delivered another 25 basis point policy rate cut, but updated projections and Chairperson Jerome Powell recently suggested a more cautious approach for 2025.
With persistent inflation and President Donald Trump’s policy mix raising the bar for justifying further rate cuts, the Fed appears to be setting a higher threshold for easing monetary policy in 2025.
The Federal Reserve had cut rates 25 bps, as expected.
This brings to 100 points of cumulative cuts since September, but the Fed is indicating a much slower, more gradual series of rate cuts in the future. The baseline is now 50 bp of cuts for 2025 based on the median of their individual forecast submissions, versus the 100 points that they were projecting in September.
Global investment bank ING said the change of view is on the back of higher inflation forecasts predominantly.
It has to be viewed in the context whereby the economy is still growing robustly, the jobs market cooling, but not collapsing and equity markets at all-time highs.
Worries rise
Powell said some Fed officials, but not all, are also already trying to incorporate uncertainties inherent in a new administration coming into the White House. Worries are rising on Wall Street that President-elect Donald Trump’s preference for tariffs and other policies could further juice inflation, along with economic growth.
“When the path is uncertain, you go a little slower,” Powell said. It’s “not unlike driving on a foggy night or walking into a dark room full of furniture. You just slow down.”
New debt limit
The biggest uncertainty is on debts as the United States could come up against its debt ceiling as soon as in mid-January, Treasury Secretary Janet Yellen said.
She urged Congress to “act to protect the full faith and credit” of the country.
Lawmakers have suspended the debt ceiling — a limit on government borrowing to pay for bills already incurred — until 1 January next year.
This means that on 2 January, a new limit will be set matching the amount of debt issued by the Treasury Department.
But the path forward could prove to be contentious if the United States hits this new limit, given that the lifting of the ceiling has been a thorny partisan issue in recent years.
“Treasury currently expects to reach the new limit between January 14 and January 23, at which time it will be necessary for Treasury to start taking extraordinary measures,” said Yellen in a letter addressed to Republican House Speaker Mike Johnson and other lawmakers.
Such extraordinary measures allow the Treasury Department to continue financing the government’s activities, preventing it from defaulting on its obligations.
The United States is not set to hit the debt limit once the suspension is over, as the country’s outstanding debt is projected to decrease by around $54 billion on 2 January, Yellen noted.
This is “mostly due to a scheduled redemption of nonmarketable securities held by a federal trust fund associated with Medicare payments,” she added.
Congress has raised the limit more than 100 times to allow the government to meet its spending commitments.
But conservatives are generally against increasing the country’s massive borrowing — currently standing at $36.2 trillion — and multiple Republicans have never voted for a hike.
If the debt ceiling is not raised or suspended before the Treasury’s tools are exhausted, the government risks defaulting on payment obligations — with profound implications for the world’s biggest economy.
One official, Cleveland Fed President Beth Hammack, thought the central bank should not have even cut rates this time around. She was the lone vote against the recent rate cut.
The reduced expectations for 2025 rate cuts sent Treasury yields rising in the bond market, squeezing the stock market. with afp
