Скачать или смотреть The Fed Cuts Again and Increases Inflation Projections - #1 - December 20th, 2024

Gary Brode of Deep Knowledge Investing and Robb Fahrion of Flying V Group discuss the 5 Things to Know in Investing This Week: The Dollar Milkshake Issue

The Federal Reserve cuts rates and increases its inflation projections?!

The Federal Reserve just completed its final meeting of the year and as expected, cut the fed funds rate by 25bp (.25%) to 4.25% – 4.50%. This was the last cut of the year with a total of 100bp (1%) of rate reductions in 2024. The press release commented on elevated inflation, expanding economic activity, and an uncertain employment situation. The Fed thinks they’ve achieved a balance in trying to reduce inflation and maintain high employment. (I think inflation is too high and the only reason the employment situation isn’t a disaster is due to government hiring.) It’s notable that Beth Hammack voted against the 25bp rate cut. This is unusual because most Fed votes are unanimous. There is a lot of attention right now on the dot plot where each Fed Governor makes predictions on where the fed funds rate will be in the coming years. The 2025 estimate rose from 3.4% in the September dot plot to 3.9%. That implies expectations for 50bp of cuts in 2025 down from 100bp of expected cuts. The 2026 estimate rose from 2.9% to 3.4%. That implies expectations for a total of 100bp of cuts (2025 plus 2026) down from 150bp of expected cuts. When you hear people talking about a “hawkish cut”, this is what that looks like. They cut, but reduced expectations for future rate cuts.

DKI Takeaway: My view is the Fed has already cut too soon and as long as Congress continues engaging in stimulus spending, they should hold the fed funds rate firm. Every inflation metric started rising right after the September rate cut so I would have preferred to see them pause. In addition to a more hawkish dot plot, the Fed increased its inflation expectations indicating it expects to make NO progress reducing inflation in 2025. When the market started to realize the Fed is signaling a slower pace of rate cuts it traded down significantly. The DKI portfolio is well-positioned for more coming inflation so no changes here are necessary right now.

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