As the calendar year 2024 closes, the Federal Reserve's unexpected move towards a "hawkish cut" marking a shift in its monetary policy is akin to the detonation of a deep-water bomb, signaling the commencement of what many are calling a "periodic rate reduction." This comes after the revelation of a detailed assessment in the December minutes of the Fed’s monetary policy meeting, held on January 8, 2024. During this meeting, Fed Chair Jerome Powell noted the officials have begun a preliminary evaluation on the potential impact of U.Spolicies, although the effects on inflation remain ambiguousHowever, the minutes indicated substantial discussions among officials regarding tariffs and immigration policies, surfacing new concerns about inflation.

In retrospect, the December rate cut should not come as a surprise, considering the persistent risks linked to inflationThe Fed's officials have taken a more cautious stance regarding future rate cuts, opting to slow down the pace of reductions in the coming months

Throughout the previous year, the narrative surrounding the Federal Reserve's monetary policy has been dramatic, oscillating between fighting inflation and focusing on employmentNow, with apprehensions about inflation resurfacing under an economic landscape of uncertainty, the Fed is pivoting again, placing inflation at the core of its rate-cutting strategy for 2025—a development that adds layers of unpredictability to the monetary policy outlook.

The cautious sentiment dominated the Fed's recent decisionsOn December 18, 2023, the Fed executed a hawkish cut of 25 basis points, with predictions for two rate cuts in 2025 slashed naïvelyPowell emphasized the necessity of "proceeding with caution." Among the 12 voting members, there was once again a dissenting voice against the rate cut decision, with the Cleveland Fed’s Loretta Mester advocating for no decrease in rates

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The dot plot indicated that as many as four officials were in favor of maintaining the interest rate between 4.5% and 4.75% by the end of 2024, illustrating significant internal opposition to the December rate cut.

This division within the Federal Reserve mirrors the dichotomous perspectives that exist regarding inflationWhile a “vast majority” of the attendees at the meeting deemed a 25-basis point cut appropriate, "some" participants advocated for keeping the federal funds rate target range unchanged, suggesting benefits in maintaining the current levelA prevailing reason for the Fed's cautious approach is that inflation has not declined as swiftly as anticipatedOfficial data indicate an upturn in the PCE price index since September 2024, complicating the path toward achieving the long-term 2% target.

The outlook for inflation in the coming year suggests that the decline may be sluggish and fraught with fluctuations

This situation is driven by several factors: the resilience of the U.Slabor market, which displays persistent inflationary pressures; widespread expectations that most policies lean towards inflating prices; and geopolitical shifts that disrupt global supply chainsThere is a consensus among participants that risks surrounding the inflation outlook have increased, with potential barriers to a swift decline appearing more substantial than previously thought.

Chair Powell candidly conveyed that the Fed is either nearing or is already at a moment of tapering the pace of rate cutsAny decisions regarding reductions in 2025 will pivot largely on upcoming dataThe current short-term economic indicators provide a foundation for the Fed’s strategyA recent rebound in the hiring plans of small businesses hints at robust job performance in the United StatesIn parallel, recent inflation data depict a modest rise, which, despite some base effect impact, signals that durable goods inflation and core non-rent service inflation remain relatively strong, reflecting a healthy U.S

economy and effective wealth effects among residents.

With inflationary threats looming once more, the Federal Reserve's focus has now pivoted back squarely to controlling inflation rather than nurturing employment growthAs 2025 approaches, expectations are that economic momentum in the United States will remain robust, while inflation forecasts see a potential uptickConsequently, the Fed may lean more towards controlling inflation, albeit acknowledging that current rates are still at restrictive levelsAccording to comments from influential officials, the likelihood of the Fed resuming interest rate hikes remains low.

The situation bears resemblance to previous trade tensions that occurred during a time characterized by low inflation in the U.SHistorically, tariffs imposed primarily affected intermediate and capital goods rather than consumer prices, leading to little significant impact on overall inflation

However, should future tariffs target consumer goods more aggressively, the inflationary pressure on American consumers could become pronounced, potentially pushing the Federal Reserve away from a stance of "not responding" as it did previously.

The increased uncertainty presents a significant challenge to the Federal Reserve’s forthcoming policy decisionsEntering a phase marked by vagueness and unclear forward guidance, the Fed might become increasingly reliant on economic data to inform its decisionsAny acceleration in future rate cuts will likely depend on inflation falling below expected levels or a more pronounced deceleration in the labor market.

Despite the prospect that near-term policies might elevate inflation, the long-term effects may be limitedFor the first time on January 8, Fed officials voiced opinions regarding tariffsBoard member Christopher Waller asserted that even if the government imposes broad tariffs, he still supports cutting rates this year, suggesting that higher import duties may not significantly raise inflation in 2024. He expressed confidence that medium-term inflation would continue to progress towards the 2% target.

In a striking contrast to the prevailing Wall Street sentiment—fueled by ongoing high prices and concerns that the Fed may refrain from substantial rate cuts in 2024—Waller believes that inflation in the U.S

is easing, albeit the pace of improvement remains uncertainCurrent market expectations suggest that the Fed may implement only one rate cut in 2024, likely around mid-year.

If Waller’s views hold true and the impact of policies on medium- to long-term inflation is indeed limited, the Federal Reserve will inevitably have to reassess the economic risks posed by maintaining restrictive interest ratesOne must remain vigilant, as protracted high interest rates continue to inflict pressure on struggling businesses, contributing to rising bankruptcy filings in the U.SIn fact, recent data suggest that at least 686 companies have filed for bankruptcy in the U.Sin 2024, marking an 8% increase from the previous year and the highest figure seen since 2010.

In summary, analysts anticipate that while the Federal Reserve seems destined to continue along a path of rate cuts in 2025, the degree of uncertainty surrounding tariff policies and the progress of inflation will likely intensify