As expected, the Fed cut rates by 25 basis points and announced an end to quantitative tightening—both steps toward further easing. However, the meeting revealed some notable divisions within the Federal Open Market Committee. One member voted against the rate cut, while another favored a larger, 50 basis point cut. This dissent was a bit unexpected.
Chair Powell also highlighted strong differences of opinion about a potential December rate cut and discussed the “neutral rate”—the level at which the Fed is neither stimulating nor restraining the economy. Powell suggested a range between 3 and 4%, higher than the 3% median estimate from FOMC members.
These factors led markets to pause and reassess the likelihood and pace of future rate cuts. While markets still anticipate a December cut, the path ahead may be shallower than previously expected. Both stock and bond markets reacted with caution.
For investors, this complexity is a sign that the Fed is weighing risks carefully—balancing the dangers of being too easy or too tough in today’s environment.
One headwind for economic growth in 2025 is the tremendous amount of economic policy uncertainty due to current tariff activity by the executive branch. The Federal Reserve Bank of Atlanta recently shared data about the negative impact of tariffs on planned investment activity (https://lnkd.in/gstDznqp). I’ve reproduced two charts from the data they provided. Thoughts:
•The top chart provides responses to the question, “How has uncertainty about tariffs, taxes, government spending, monetary policy, or regulation affected your firm’s plans for hiring/investment over the next 6 months?” Over 40% of respondents stated they would scale back hiring plans and investments in response to economic uncertainty, with less than 5% stating they would expand hiring/investment. This scaling back points to slower growth in the coming months.
•The bottom chart shows responses to the question, “What is your firm’s top concern with respect to uncertainty affecting your firm’s hiring/investment plans over the next 6 months?” We clearly see tariffs dominate the conversation, with more than 50 percent of respondents noting tariffs are the top source of uncertainty.
Implication: Federal Reserve survey data from N = 961 firms points to tariff-induced uncertainty causing business to scale back hiring and investment plans over the coming months. There is a tremendous body of economic literature detailing the negative effects of economic policy uncertainty in terms of investment. As I’ve stated before, supply chain managers cannot make effective plans around 90-day windows and not knowing if major policy shifts will occur with short notice. Many are anxiously awaiting news on reciprocal tariff levels come July once the 90-day pause on their implementation ends.
#supplychain#economics#markets#shipsandshipping#manufacturing#logistics
The Federal Reserve is facing a problem that goes deeper than interest rates or inflation prints. I've written my thoughts about it this morning in this article. These are my thoughts.
The Fed's own mandate is pulling it in two directions at once and the strain is starting to show. There is a split inside the committee, which became very evident yesterday. Policymakers who share the same data are reaching very different conclusions about where rates should go next.
The problem is that the Fed is expected to deliver both stable prices and something it calls maximum employment. The first has a clear target. The second does not. It is a judgement that shifts with demographics, technology and global supply patterns. When inflation remains above target but labour market indicators soften, the mandate offers no obvious hierarchy.
Some officials believe employment risks must take priority. Others insist inflation should dominate.
This tension matters because it shapes how markets interpret every signal the Fed gives. A divided committee rarely tells a clear story and clarity is the currency central banks trade in. As the world economy changes at speed, does the dual mandate still help the Fed or is it becoming an obstacle to the very stability it is meant to support? The other the question to ask is whether this dual mandate actually threatens the Fed's independence i.e. whatever decision it makes is questioned politically, making it vulnerable to political attack.
What are your thoughts?
The Federal Reserve minutes are out (link below), and they point to a deeper and broader range of disagreements than indicated at the December 9-10 FOMC meeting.
In addition to different sensitivities to the risk of higher inflation on the one hand, and a weaker labor market on the other, these include:
Some of those who voted for the cut signaling that they would have also been comfortable not cutting;
Lack of clarity on the timing of future cuts and, in the event of a (no-cut) pause, how extended this should be; and
Disagreement on the extent of the price pass-through of tariffs, as well as how “entrenched” inflation is becoming.
https://lnkd.in/ebKNUuMx#economy#markets#growth#inflation#federalreserveFederal Reserve Board
Dueling Mandates
The Federal Reserve’s dual mandate - to foster price stability and full employment - is rapidly morphing into a dueling mandate. The Fed’s Beige Book revealed that the labor market remains stuck in its low hire, low fire, stagnate mode, while inflation is accelerating. It noted stickiness in service sector inflation and incidents of opportunistic pricing. The latter are price hikes on goods that are not directly tariffed but benefit from the lack of completion that tariffs trigger.
Shifts in the data prior to the shutdown further complicated the Fed’s assessment of the economy. Employment was revised down, while economic growth was revised up. That is unusual - understatement.
Preliminary reports on the third quarter reveal an acceleration of consumer spending. What we have to ask ourselves is why? Is it due to inequality, doing more with less or a measurement problem? Probably some combination of all of the above.
The measurement issue is the most important to the Fed. The official data often is slow to capture rapid shifts in the economy. Staffing shortages are worsening that problem. More than a third of the prices in the August CPI were imputed, as field officers were idled earlier this year.
How does that distort our view of the economy? If we are undercounting inflation, then we are overstating economic growth. Chair Powell used the words “may be” when talking about the recent strengths of the economy. Revisions could reveal a weaker economy - that is what doves on the Fed are betting. If they are not, we could have more support for inflation than is understood.
Adding to the uncertainty we face is the government shutdown, which leaves us with a dearth of data and could be more consequential to the economy than past shutdowns. It is hitting more workers that past shutdowns with threats of larger cuts & ripple effects to the communities in which they live. The bulk of those workers live outside of the beltway in DC.
Another challenge for the Fed is inflation expectations. Research by the Boston Fed suggest that expectations may be becoming unmoored, or normalized.
Tariffs typically represent a one-time bump in prices, which is self-correcting. The sequencing of tariffs on the heals of the pandemic inflation has left them mimicking inflation. That could further normalize inflation and make it a self-fulling prophecy.
Bottom Line
The Fed is left with “no risk-free path” for policy. If it doesn’t cut, it risks a recession. If it cuts too aggressively, it could stoke a more persistent bout of stagflation. That has left it moving with caution instead of certitude, cutting in 1/4 point moves to avert the worst in labor market weakness without stoking inflation.
Prospects for 2026 are murkier & could shift with changes in Fed leadership. History is unkind to central banks which prioritize employment over inflation. Any gains in employment tend to be short-lived & stoke a more entrenched bout of inflation.
Fed Chair Powell has warned that there are “no risk-free paths now.” He’s referring to the challenging situation for the Fed with the risk of inflation persistently above target and the risk of employment weakening. Reduce rates to support employment, and the Fed might fuel inflation. Hold (or even raise) rates to fight inflation, and the labor market could deteriorate.
Powell’s warning applies to the Fed itself, too. The risk of political interference in setting interest rates is at its highest level in living memory, with the President trying to remove Fed Governor Lisa Cook. Even if the Supreme Court upholds the Fed’s tenure protections and the Fed maintains its operational independence, the risk remains that President Trump will install new Board members who will alter its current, data-driven, non-partisan approach.
#federalreserve#independence#fomchttps://lnkd.in/eHga7ABJ
The #FederalReserve (Fed) held interest rates steady for the fourth consecutive time today, signaling a dovish stance. While two rate cuts are still projected for later this year, they are not guaranteed and depend on economic data. The Fed is monitoring signs of labor market weakness and external risks like tariffs and geopolitical conflicts, which could be seen as price shocks rather than inflationary pressures. Inflation expectations have remained contained, and leading indicators suggest some economic softness. Easing monetary policy without a recession tends to be positive for risk assets, making this meeting potentially bullish for markets.
The Secured Overnight Financing Rate (SOFR) has now risen above the Fed Funds rate. This is a rare inversion that signals tightening liquidity conditions in the funding markets, even as the Fed continues easing through rate cuts.
This isn’t the first time we’ve seen this movie. In 2019, a similar dynamic emerged when reserve levels quietly became scarce. Repo rates spiked, forcing the Fed to abruptly end QT and restart liquidity injections long before they had planned. The signs then were almost identical to what we’re seeing now: SOFR drifting above policy rates, excess cash in reverse repo facilities drying up, and increased use of the Fed’s standing repo facility.
If this inversion persists, it could push the Fed to halt QT earlier than expected and pivot toward balance sheet expansion or repo operations to stabilize funding markets.
Funding markets typically flash warning signals well before credit spreads widen or risk assets reprice. SOFR’s move is one of those signals.
As we continue to dissect the complexities of the U.S. economy, one key aspect stands out: the ongoing asynchronous, almost 'two-speed economy' that we have been describing for some time. This dynamic sees some sectors, like the current technology giants as well as high-income households still thriving under higher interest rates; by comparison, others, particularly construction, trade, and levered entities, are feeling the pinch.
Without question, this week’s GDP data for 4Q 2024 showcased these contrasting trends. We saw solid headline growth of +2.3%, driven by an outsized consumption uptick of +4.2%. Goods consumption soared by +6.6%, likely fueled by pre-buying ahead of impending tariffs, while services remained robust at +3.1%. Government spending also contributed positively with a growth of +2.5%.
On the flip side, sectors sensitive to interest rates and global trade struggled, with net exports flat and non-residential construction down by -1%. Interestingly, inventory drawdowns shaved a hefty 90 basis points from our GDP figures, a trend we expect to reverse somewhat in 2025 (despite higher tariffs).
Looking at the broader picture, we at KKR still view the U.S. economy through a 'glass half full' lens. The Fed's gradual approach to easing rates comes amid strong equity performance, solid GDP growth, and stable credit spreads. No doubt, tariffs matter and there are more details to come, but our best estimate remains that – on net – new tariffs will subtract a combined 40 basis points from U.S. GDP in 2025, which we still pencil in at 2.5% including tariff drags.
Meanwhile, on the rates side, the Fed recently held rates steady at 4.375%, signaling a ‘pause’ to assess the early impacts of the new administration's policies on tariffs, immigration, and spending. Chair Powell highlighted that the Fed isn't in a rush to cut rates further, opting to wait for signs of cooler inflation or a softer labor market before making any moves. Our outlook suggests that core inflation will drop from 3.3% today to around 2.8% by the end of 2026, which should allow the Fed to cut rates twice this year and twice next year while keeping real rates around one percent. Embedded in our forecast is that tariffs boost inflation by 30 basis points in 2025. By comparison, current market pricing appears overly hawkish, and we see better relative value in the belly of the curve (around the 5–7-year point). So, bigger picture, we continue to think we are in a higher-for-longer environment at the long end, given persistent fiscal deficits and the ongoing regime change towards higher nominal GDP growth.
Beyond inflation and rates, we expect the currency market to remain extremely volatile. We saw a similar pattern in 2018 under President Trump 1.0, and we see now reasons why the macro environment for currencies will be different under President Trump 2.0. Read more about the impact of tariffs on growth and inflation in our 2025 Outlook: https://go.kkr.com/4a2pcP7
The US Federal Reserve cut interest rates by 50 basis points, bringing the benchmark rate down to 4.75%-5%. This marks the first rate cut of this size in over a decade, signaling a shift in focus from fighting inflation to supporting economic growth.
📊 Key Insights:
• Inflation is under control, having eased from a high of 9.1% in 2022 to 2.5% in August 2024. The Fed’s decision highlights confidence that inflation will continue to trend toward its 2% target.
• However, the pace of rate cuts (50 bps now, with potential for more) signals caution, as the Fed looks to balance economic support with inflation management.
⚠️ Recession Fears Still Loom:
• While a 50 bps cut might seem like a boost, it reflects concerns about the cooling labor market and slowing growth. Unemployment has risen to 4%, and job gains are softening.
• The yield curve steepening after the cut is a classic indicator of recession risk. Though the Fed remains optimistic, there’s growing uncertainty about the long-term growth outlook, making this cut a double-edged sword.
🇮🇳 Impact on Indian Markets:
• The weakening US dollar and dovish Fed stance could support capital inflows into Indian equities as global investors seek higher returns.
• Rupee strengthened, reflecting confidence in India’s relative stability. However, India’s export sector could face challenges if the rupee appreciates further.
• Indian central bank’s next moves will be key, as the RBI may take a more cautious approach in light of global easing trends.
🔍 What Lies Ahead?
The Fed’s data-driven approach means future cuts are likely, but the broader concern is whether these cuts will be enough to sustain growth without triggering further economic turbulence.
#USFed#RateCut#RecessionFears#GlobalEconomy#IndianMarkets#Inflation#Investment#RBI