Monetary Policy & Inflation | US
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Summary
- The 2025 dots could reflect current Fed messaging rather than strong conviction over 2025 inflation.
- This creates a risk that the Fed could keep lifting its 2025 dots through 2024.
Market Implications
- I continue to expect the first cut in June.
Powell Drops Hints in Ryssdale Interview
The interview with Kay Ryssdale made me wonder about Powell’s views on 2025 and the possibility of more increases in the 2025 FFR during 2024. As Powell highlighted, the 2024 cuts are meant to reflect economic normalization. That is, the FFR was 1.6% before the pandemic, and Powell does not want the FFR to still be 5.35% when the economy fully normalizes. This is likely because he thinks (I agree) this would trigger a recession. Yet he also does not see rates returning to their pre-pandemic levels.
But what about 2025? Powell’s comment that the economy is not suffering from such high rates suggests he sees only limited transmission of policy tightening. Does that not create a risk of overheating once the ‘supply-side healing’ is over? Given the Fed’s hyper data dependency, FOMC members are unlikely to have strong views on 2025.
Yet since the FOMC publishes the dots, they must give a number. So rather than a deep conviction, perhaps their 2025 dots reflect current messaging (we are easing), which they want to keep simple. That is, they want to avoid discussing why they would ease before hiking again.
This highlights how central bank transparency can be too much of a good thing. By forcing the Fed to convey more certainty than they have, the dot plot risks raising market volatility.
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Dominique Dwor-Frecaut is a macro strategist based in Southern California. She has worked on EM and DMs at hedge funds, on the sell side, the NY Fed, the IMF and the World Bank. She publishes the blog Macro Sis that discusses the drivers of macro returns.
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