Highlights

SGH reports are highly valued for helping clients understand and stay ahead of the news cycle on central banks and macro policy events that drive the global economies and financial markets.

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2025
February 04, 2025
SGH Insight
The stated logic of a pause in April would be to downshift the pace of rate cuts as soon as rates touched the top end of a theoretical long-term neutral range.

But with euro interest rates still clearlyrestrictive by any real-world metrics, at least for this cycle, markets have over these last days fully priced a cut in April, or as we said “a straight line” of 25bp cuts every meeting through June, and beyond that a destination a bit south of 2%.

On a related note, we also made a bit of hay out of indications in Davos by ECB President Christine Lagarde that an ECB staff review due out on February 7 of the euro area long-term neutral range could peg that at a 1.75% to 2.25% range, as opposed to the slightly higher 1.75% to 2.5% range usually cited by analysts and reporters.
Market Validation
Dow Jones 2/7/25
The neutral rate of interest that neither spurs nor slows growth in the eurozone is between 1.75% and 2.25%, according to calculations published Friday by economists at the European Central Bank.
The ECB last week cut its key interest rate for a fifth time since June 2024, but said its policy continues to restrain economic activity. But with policymakers increasingly confident that inflation will fall to their target, and with growth proving weaker than expected, investors are looking for indications of where the cutting cycle will end.
The neutral range identified by the ECB's economists is below the 2.75% key rate set last week, and policy makers have signaled that they are likely to lower borrowing rates at upcoming meetings.
Read Full Report
January 29, 2025
SGH Insight
UK Chancellor Rachel Reeves’ declaration that the ruling Labour Party’s “number one mission” is growth, has set the stage for the Bank of England (BOE) to resume rate cuts with a 25-basis point easing to 4.50% at its February 6 meeting.

Notwithstanding the government’s plans to reinvigorate the UK economy over time, the government’s still bleak fiscal position remains, and the risk of persistent financial tightening suggests the Bank will be forced to cut rates to 3.75% by year’s end and likely further next year.
Market Validation
MarketWatch 2/6/25
One voter known as a hawk wanted a half-point rate cut
The Bank of England put a dovish twist to an expected rate cut, sending the British pound and bond yields lower.
The central bank, as expected, cut interest rates by a quarter-point, its third reduction since August, to 4.5% from 4.75%.
But there was a surprise in that the decision to lower rates was unanimous and that there were two votes for a half-point reduction.
One of the votes, Swati Dhingra, has been a persistent dovish voice, but Catherine Mann's dovish vote was a surprise. As recently as November, Mann had voted to keep rates at 5% when the rest of the committee voted for a quarter-point cut.
The simultaneously released minutes showed that one of the half-point cut calls was to "give a clearer signal of financial conditions appropriate for the United Kingdom, even as monetary policy would need to remain restrictive for some time to anchor inflation expectation." That's likely in reference to the surge in bond yields that only recently has subsided.
Read Full Report
January 28, 2025
SGH Insight
The European Central Bank will cut 25bp, from 3% to 2.75% on its benchmark deposit facility rate, when the Governing Council convenes this week in Frankfurt.

While preserving the flexibility of its “meeting by meeting” approach to rate decisions, President Christine Lagarde will affirm what markets already know, that this is not the last rate cut, and that more cuts are likely to follow.

The cadence and final destination for rates will be left open, but we continue to expect the ECB to cut rates by 25bp at every meeting – Jan, Mar, Apr, Jun – until the deposit rate hits 2% in June (see also SGH 1/15/25, “ECB: Shifting Balance of Risks”).

Putting exogenous forces for a moment to the side, market expectations of ECB rate cuts have also pulled back of course by a backup since December in rate cut expectations by the US Federal Reserve. Furthermore, markets have put great weight on the assessment by Executive Board Member Isabel Schnabel that the nominal neutral rate for the euro area economy lies well north of 2%, and so by extension any cuts below 2.5% will be delivered much more cautiously, feeding into the narrative of an April meeting skip.

While she is extremely influential, Schnabel’s assessment of a significantly higher than 2% neutral rate is not shared more broadly across the Governing Council, and ECB.

Indeed, in an interview last week in Davos, Lagarde pegged neutral as probably somewhere between 1.75% and 2.25%. From Lagarde:

You know, the [ECB] teams do as much work as they can to pin it [neutral] down within a range that is as reduced as possible. At the moment, it’s anything between, you know, 1.75, and 2.25, people will be discussing that at length. When we get closer to that, it will, the debate will be a little bit hotter, but it’s that very, very subtle point where our monetary policy neither stimulates nor restricts, and it’s, it’s a touch and go.
Market Validation
Bloomberg 1/30/25
The European Central Bank lowered borrowing costs for a fifth time since June, with the region’s economy stalling and the 2% inflation target in reach.
Officials reduced the deposit rate by a quarter-point to 2.75% — as predicted by all analysts in a Bloomberg poll. They continued to describe their current monetary-policy stance as “restrictive,” signaling more loosening is in the pipeline, while reiterating that they’re not pre-committing to a particular rate path.
“We know the direction of travel,” President Christine Lagarde said, describing Thursday’s decision as unanimous. “For those who would like to have this solid forward guidance, it would be totally unrealistic to do anything of that nature, simply because we are facing significant and probably rising uncertainty at the moment.”

Bloomberg 1/30/25
German bond yields slumped as traders upped bets on interest-rate cuts from the European Central Bank this year, after policymakers lowered borrowing costs as expected and described their current monetary policy stance as restrictive.
Yields on two-year bunds fell as much as 10 basis points to 2.18%, the biggest drop in two months. Traders moved to price an additional 73 basis points of rate reductions from the ECB by year-end, up from around 65 basis points ahead of the decision.

Bloomberg 2/7/25
Economists at the European Central Bank said
the neutral rate of interest, a concept that may help determine
where cuts in borrowing costs will end, is probably between
1.75% and 2.25%.
Read Full Report
January 26, 2025
SGH Insight
The Fed will leave interest rates unchanged at the end of this week’s FOMC meeting. We don’t think Fed Chair Jerome Powell will give a nod toward cutting rates in March. There isn’t yet any appetite at the Fed for a rate cut given still resilient growth and Trump-related policy uncertainty.

This week’s FOMC meeting should end without any fireworks. Unless the data unexpectedly breaks weaker, the Fed will remain on hold for the near term as it assesses the economy and the impacts of Trump’s policy agenda. We expect that Powell will maintain the status quo for policy expectations in the post-meeting press conference and we don’t think he will give a nod in favor of a March cut.
Market Validation
Wall Street Journal 1/29/25
The Federal Reserve hit the pause button on recent interest rate cuts, entering a new wait-and-see phase as it tries to determine whether and how much more to lower rates from a recent two-decade high.
The decision on Wednesday to leave the benchmark federal-funds rate at its current range around 4.3% followed three consecutive rate cuts beginning in September, when the rate stood around 5.3%.
Officials made only minor changes to the policy statement they released at the conclusion of their two-day meeting. The statement indicated comfort with their interest-rate stance for an economy where inflation remains somewhat above their goal and where labor market conditions have been solid.

AFP 1/29/25
The US Federal Reserve left its key lending rate unchanged Wednesday and adopted a patient "wait and see" approach to Donald Trump's economic policies, in the first decision since his return to the White House.
Policymakers voted unanimously to keep the Fed's benchmark lending rate at between 4.25 percent and 4.50 percent, the Fed announced in a statement.
"With our policy stance significantly less restrictive than it had been, and the economy remaining strong, we do not need to be in a hurry to adjust our policy stance," Chair Jerome Powell told reporters after the decision.
Read Full Report
January 23, 2025
SGH Insight
With the threat of US tariffs looming, the Bank of Canada (BOC) is poised to keep easing from its first meeting this year on January 29 and follow with additional rate cuts through this year as the country braces for a trade battle with the US.

BOC Governor Tiff Macklem, who arguably overachieved on his campaign to wrestle inflation back down to within the Bank’s target band, is now facing tariff-inspired downside growth risks far greater than he probably foresaw.

US President Donald Trump’s blanket 25% tariffs threat against Canada on February 1, if applied across the board, would plunge the US’ northern neighbor into recession.

Notwithstanding the BOC downshifting to a 25-basis point rate cut at this meeting, in our last report (see 1/7/25; “BOC: Not Done Yet”) we warned that December’s 50 bps cut to 3.25% was by no means its last move.

After January’s cut, the Bank may opt to skip the March 12 meeting while it waits for more clarity about the extent of US duties on Canada and resume cuts at its April 16 forecast round which would take rates down to 2.75%.
Market Validation
Bloomberg 1/29/25
The Bank of Canada cut interest rates by a quarter percentage point and dropped guidance on any further adjustments to borrowing costs as US President Donald Trump’s tariff threat clouds the outlook.
“The economy is expected to strengthen gradually and inflation to stay close to target. However, if broad-based and significant tariffs were imposed, the resilience of Canada’s economy would be tested,” the bank said in its statement.
Bonds surged as the market absorbed the central bank’s decision not to provide guidance on future rate moves. The yield on Canada’s two-year notes slid some four basis points to 2.79%, the lowest since 2022. The loonie maintained the day’s losses against the US dollar, trading at C$1.4448 as of 10:03 a.m. in Ottawa.
Officials called the 200 basis points of easing since June “substantial.” The smaller reduction follows to back-to-back half percentage point cuts in October and December.
Combined, the communications suggest the central bank isn’t likely to make further adjustments to monetary policy until the specifics of Trump’s trade policy become clearer. Absent that threat, Canada’s economy looks increasingly headed for a soft landing.
Read Full Report
January 22, 2025
SGH Insight
Trump and Xi discussed Ukraine, and Xi conveyed that Russia’s President Vladimir Putin was willing to meet Trump without any preconditions and hoped they would meet as soon as possible. Trump said a possible meeting with Putin is being prepared.
Market Validation
Bloomberg 1/23/25
President Donald Trump sought to dial up pressure on President Vladimir Putin to negotiate a deal to end Russia’s war on Ukraine by indicating he’s seeking to partner with China to try to reach a settlement.
“Hopefully China can help us stop the war,” Trump said during a video address at the World Economic Forum in Davos on Thursday. “They have a great deal of power over that situation.”
He’d discussed the issue with Chinese President Xi Jinping during their phone call on Friday “and hopefully we could work together and get that stopped,” Trump said. The Chinese readout from that discussion stated the two “exchanged views on the Ukraine crisis” without providing any further detail.
Read Full Report
January 21, 2025
SGH Insight
The Fed is on hold for the foreseeable future. With economic activity and job growth still resilient, the Fed has an opportunity to be very patient while it assesses the policies of the new administration. We don’t anticipate a rate cut in the first half of the year and believe that Fed hawks will put up a bigger fight before acquiescing to another round of recalibration cuts.
Market Validation
Treasuries Slide to Day’s Lows After Changes to FOMC Statement
Bloomberg 1/29/25
Treasury futures drop sharply to lows of the day after Fed keeps rates in target range of 4.25%-4.5% but makes some changes to its policy statement regarding inflation and employment which the market takes as hawkish.
Treasury yields cheaper by 3bp to 4bp across the curve in a bear-flattening move, sending 5s30s spread to lows of the day after the statement
Fed OIS prices in approximately 5bp of easing for the March policy meeting vs 7bp earlier Wednesday, and a total of about 43bp by year-end vs 48bp earlier
Read Full Report
January 15, 2025
SGH Insight
Markets have taken almost a full rate cut out of the euro rate curve over the past month, and almost two rate cuts since the peak dovish pricing of early December.

This has been driven in large part by a relentless back up in US yields and 2025 Fed rate cut expectations (see “SGH Tim Duy’s Fed Watch” reports), from which there was some relief finally today, and by a consistent message from European Central Bank officials stressing the virtues of sticking to a “gradual” – meaning 25bps – pace of rate cuts in the face of uncertainty.
Market Validation
Reuters 1/30/25
The European Central Bank cut interest rates as expected on Thursday and kept more easing on the table, sticking to its view that inflation in the euro zone is increasingly under control despite concerns about global trade.
Read Full Report
January 12, 2025
SGH Insight
The employment report supports our expectations that the Fed will hold rates steady for the foreseeable future, likely at least for the first half of this year. Lacking a pressing reason to cut rates and an uncertain path of inflation given Trump’s tariff threats, the Fed expects it has time to move to the sidelines and assess the impacts of past policy actions. Most FOMC participants still expect additional rate cuts this year if inflation falls as expected, but we note those same participants may see those cuts as unnecessary if growth and labor markets remain resilient.
Market Validation
Bonds Slide After Fed Tweaks Language on Inflation Progress
By Sebastian Boyd
Bloomberg 1/29/25
Bonds extended declines as the FOMC held rates, in line with expectations, but removed language about inflation making progress toward its goal. That’s a hawkish tweak in the statement. The two-year yield jumped through 4.24% and the dollar pared earlier declines.

*FED REMOVES REFERENCE TO INFLATION MAKING PROGRESS TOWARD GOAL
Read Full Report
January 09, 2025
SGH Insight
Hawkish Minutes Overshadow Dovish Waller

Federal Reserve Governor Waller reiterated support for additional rate cuts if inflation falls as expected, but the release of the December FOMC meeting minutes reveal that the consensus on the Fed wants to delay rate cuts. Even Waller suggests that the Fed expects to hold policy steady until Trump-related uncertainty lifts. That uncertainty likely won’t lift until the second half of the year, which may put the Fed in an uncomfortable position of not responding quickly with easier policy if inflation falls meaningfully by March as base effects wash out of the data.
Market Validation
Bloomberg 1/9/25
Several Federal Reserve officials confirmed Thursday the US central bank will likely hold interest rates at current levels for an extended period, only cutting again when inflation meaningfully cools.
Boston Fed President Susan Collins said Thursday a slower approach to adjusting interest rates is merited now as officials confront “considerable uncertainty” over the US economic outlook. The view was echoed by colleagues from other reserve banks and by Governor Michelle Bowman.
Read Full Report
January 07, 2025
SGH Insight
Canadian Prime Minister Justin Trudeau’s resignation will keep a dovish lean to Bank of Canada (BOC) monetary policy this year as it looks to prevent the current economic slowdown from escalating into a full-blown recession.

The Bank will likely step down to 25 basis-point cuts from its first meeting of the year on January 29 after easing 50 bps to 3.25% in December – the second consecutive 50 bps increment.

But greater-than-expected economic drag as a result of protracted political uncertainty, as well as the looming specter of US tariffs may prompt rates to be cut to a more deeply accommodative level than the BOC was previously contemplating.
Market Validation
Bank of Canada Cuts Rates, Warns of Economic Shock From Trade Conflict
By Paul Vieira
Dow Jones -- OTTAWA-- 1/29/25
The Bank of Canada on Wednesday cut its benchmark rate for a sixth straight time, and warned of a significant shock to the economy from a U.S.-Canada trade conflict with tariffs of up to 25%.
Canada's central bank lowered its policy rate by a quarter-point to 3. In its decision, the Bank of Canada said a recent rebound, fueled by aggressive rate cuts since last June, is in jeopardy should President Trump follow through on his threat of a 25% tariff on imports from Canada and Mexico. Canadian officials have vowed to retaliate forcefully with tariffs of their own.
"A long-lasting and broad-based trade conflict would badly hurt economic activity in Canada," Gov. Tiff Macklem said, adding tariffs would also push prices higher.
Read Full Report
January 06, 2025
SGH Insight
The US dollar weakened sharply today on a Washington Post news report that President-elect Donald Trump’s economic team is mulling universal tariffs on select strategic industries, instead of on all imports into the United States. Examples of these sectors are reported to include defense industrial production, medical, and energy supply chains.

This report is credible, and we have long maintained that the Trump 2.0 administration, which ran hard and successfully against President Biden’s poor track record on inflation, will, led by Treasury Secretary nominee Scott Bessent, manage its way carefully in implementing potentially inflationary tariff policies.

That said, we would push back strongly against any conclusions that the roadmap outlined in the WaPo article will be followed instead of other broad, and aggressive tariff measures.

Notably, we expect the Trump administration will, as promised in no uncertain terms on the campaign trail, impose substantial and significant tariffs on China, and cast a wide net on the domestic industries it will seek to protect, including for example the auto industry.
Market Validation
Bloomberg 1/14/25
Members of President-elect Donald Trump’s
incoming economic team are discussing slowly ramping up tariffs
month by month, a gradual approach aimed at boosting negotiating
leverage while helping avoid a spike in inflation, according to
people familiar with the matter.
One idea involves a schedule of graduated tariffs
increasing by about 2% to 5% a month, and would rely on
executive authorities under the International Emergency Economic
Powers Act, the people said.
The proposal is in its early stages and has not yet been
presented to Trump, the people said — a sign that a monthly
stepped approach is early in the deliberation process.
Advisers working on the plan include Scott Bessent, the
nominee for Treasury secretary, Kevin Hassett, set to be
director of the National Economic Council, and Stephen Miran,
nominated to lead the Council of Economic Advisers, said the
people, who requested anonymity to discuss internal
deliberations.
Read Full Report
January 05, 2025
SGH Insight
The Fed believes that its 100bp of rate cuts in 2024 provides it room to hold policy steady for an extended pause as it assesses the likely impact of Trump 2.0 policies. This is likely a forecast dependent outcome that will not be impacted by small deviations of the data from expectations. In the near term, the Fed is likely to react only to data that substantially changes the forecast. That pushes any rates cuts into the back half of the year, which implies fewer cuts than if the Fed maintained a quarterly pace of cuts throughout the year. That means the Fed needs worse labor market outcomes than we expected to bring about a more rapid return to a more neutral policy stance.

Following the pattern of late 2022 and 2023, the Conference Board labor differential has risen from its September low:
Given that we have seen a similar pattern three years running, as well as the relative weakness in employment PMIs, we are wary to conclude that the labor market has persistently inflected higher. That said, last year there was seasonal strength in the employment numbers that helped push back rates cuts until September. A reoccurrence of that pattern would help put an end to speculation that the Fed could return to rate cuts as early as March.
Market Validation
Fed Rate-Cut Bets Get Pushed Into Second Half of 2025
By Kristine Aquino
Bloomberg 1/7/25
The stronger-than-expected services data just gave traders the green light to push their expectations for a rate cut into the second half of 2025.

Prior to Tuesday’s releases, traders were leaning toward a quarter-point reduction from the Federal Reserve by the June meeting. Yet growth and inflationary signals from the data suggest the US economy is accelerating.

That leaves the prospect of a rate cut as a theme for the second half of this year, for now. Yet if more signs of economic strength emerge, particularly from Friday’s nonfarm payrolls report, there’s every possibility that the notion of even just one cut this year becomes more far-fetched.

Bloomberg 1/10/25
US Treasuries plunged as evidence of a resilient labor market pushed traders to shift their expectations for the Federal Reserve’s next interest-rate cut to the second half of the year.
The selloff pushed yields higher across the curve on Friday after US employment in December advanced by the most in nine months, sending 10-year yields to the highest since 2023. Yields on notes maturing in two to seven years were all higher by more than 10 basis points, while the 30-year approached the 5% level.
Swaps traders are pricing in about 28 basis points of total Fed cuts this year, compared to about 38 basis points before the data release. A full quarter-point reduction isn’t seen until around October, from around June before the report.
Read Full Report
2024
December 18, 2024
SGH Insight
We will move quickly through the easy parts of today’s FOMC meeting:

· The Fed cut rates 25bp and used the statement to signal that it would not cut rates in January or possibly thereafter. Specifically, the “timing and extent of additional adjustments” language has been used previously to signal the possibility of an extended pause. While a notch more hawkish that we thought, it matches our overall expectation that the Fed would leave open the possibility of a pause rather than signal a skip. We didn’t think the Fed would skip January without anticipating a greater-than-even chance that it would skip March as well, and that appears to be the case.

· Powell declared policy now sits at a more neutral setting and is “significantly” less restrictive. FOMC participants have signaled for weeks that after this week’s cut rates would be sufficiently close to neutral, and at that point they were comfortable slowing the pace of additional cuts. This is another signal of a January skip.

· The Fed edged up the estimate of neutral. FOMC participants now think the neutral rate is 3%, in line with our expectations.

· Hawks didn’t want to cut. We thought that there would be resistance to a rate cut from Fed hawks, and they were only willing to go along with it on strong assurances the Fed would not cut in January. That resistance became evident with Cleveland Federal Reserve President Beth Hammack’s dissent (we thought that Bowman would be the most likely to dissent).

· Powell indicated the Fed would strongly resist a January rate cut. We thought that a January skip would be forecast dependent rather than data-point dependent and speculated that Powell could front run a weak employment report by resetting the unemployment baseline to this summer. Powell did exactly that:
Market Validation
Fed Minutes Suggest Officials Will Hold Rates Steady for Now
By Nick Timiraos
Wall Street Journal 1/8/25
The "vast majority" of the 19 officials who participated in that meeting thought a quarter-point rate cut was appropriate, the minutes said. But some officials thought there was merit in keeping rates unchanged last month, and a majority had indicated the decision to cut rates was a close call, according to the minutes.
The minutes further suggest officials were broadly comfortable holding rates steady at their upcoming meeting at the end of this month. "Participants indicated that the committee was at or near the point at which it would be appropriate to slow the pace of policy easing," the minutes said. Officials thought under their current outlook for economic activity, the Fed could continue to cut rates at a slower pace than they had in recent months.
"Almost all participants judged that upside risks to the inflation outlook had increased," the minutes said.
The economic forecast prepared by the Fed's staff of economists also incorporated some initial assumptions about changes to tariffs that would lead inflation to be somewhat higher than previously anticipated in 2025 before resuming its recent decline after that.
In addition to the uncertainty over potential policy changes by Trump, who takes office on Jan. 20, Fed officials aren't sure what constitutes a "normal" or neutral interest rate that neither spurs nor slows the economy. For much of last year, their benchmark interest rate sat near a two-decade high, at 5.3%, and nearly all officials thought rates were in restrictive territory.
But after cutting interest rates at their last three meetings by a cumulative percentage point since September, they are less certain over where rates sit relative to an unobservable "neutral" level. At a news conference after last month's meeting, Fed Chair Jerome Powell said officials were ready to slow down cuts because of uncertainty over how restrictive their policy stance would be after having lowered rates by one percentage point.
Read Full Report
December 17, 2024
SGH Insight
Having failed to adequately signal plans for a near term rate hike, the Bank of Japan (BOJ) is highly unlikely to surprise markets and so will hold rates steady when the Board meets this week.

A last-minute media leak to revive rate hike expectations for the December 18-19 meeting would now be destabilizing for markets and prompt another backlash over sub par communications, so the window for shifting market expectations has all but closed, with the BOJ poised instead to signal its next move will come in early 2025.

Governor Kazuo Ueda will use this week’s meeting to tee up a 25 bps hike at the January 23-24 meeting. He and other Board members will build on that message through the intermeeting period to try to arrest the slide in the yen and manage market expectations into the next forecast round meeting.
Market Validation
Bloomberg 1/24/25
The Bank of Japan raised its key policy rate
Friday to the highest level in 17 years, as Governor Kazuo Ueda
continues his mission to return to central bank orthodoxy.
Ueda and his fellow board members lifted the overnight call
rate by a quarter-percentage point to 0.5% at the end of a two-
day meeting, according to a statement from the central bank. The
decision to hike was in line with market expectations. The BOJ
said it will continue to raise rates if its economic outlook is
realized.
Read Full Report
December 15, 2024
SGH Insight
The Fed will cut policy rates 25bp this week and signal an expectation to slow the pace of cuts in 2025. We expect that between the statement, SEP projections, and the press conference, the Fed will send the message that barring a sudden slowing of the labor market, it anticipates not cutting rates in January and that while FOMC participants generally still anticipate further reductions in policy rates, it’s possible that a January skip becomes a pause. Our expectations for the meeting outcomes follow below.

Another place to signal a slower pace of rate cuts is in the policy guidance. This guidance:

In considering additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.

Could evolve to something like:

In considering the timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.

Monday Morning Notes, 12/16/24

The press conference

We anticipate that Powell will send a strong signal that the Fed does not anticipate cutting rates in January.

Powell will likely indicate that this week’s rate cut will bring policy sufficiently close to estimates of neutral that the Fed can approach further adjustments more cautiously.

Powell will emphasize that the Fed is in no hurry to return to a neutral policy setting. He will praise the resilience of the economy and labor markets. The recent GDP data indicate less downside risks to the economy than believed earlier in the quarter and allow for the Fed to move at a slower pace as it probes for the neutral policy rate. We anticipate Powell will remain confident that inflation will continue to return to target. Moreover, he will reiterate that the Fed still anticipates additional rate cuts as policy remains above most estimates of neutral but could highlight the uncertainty in those estimates.
Market Validation
US Fed cuts key rate a quarter point, signals fewer cuts ahead
AFP 12/18/24
The US Federal Reserve cut interest rates by a quarter point Wednesday and signaled a slower pace of cuts ahead, as uncertainty grows over inflation and President-elect Donald Trump's economic plans.
Policymakers voted 11-to-1 to lower the US central bank's key lending rate to between 4.25 percent and 4.50 percent, the Fed announced in a statement.
The sole holdout, who supported keeping rates where they were, was Cleveland Fed President Beth Hammack.
In updated economic forecasts published alongside the decision, members of the Fed's rate-setting committee penciled in just two quarter-point rate cuts in 2025, down from an earlier prediction of four, and hiked their inflation outlook for next year, from 2.1 percent to 2.5 percent.

FOMC Statement
In support of its goals, the Committee decided to lower the
target range for the federal funds rate by 1/4 percentage point
to 4-1/24 to 4-3/41/2 percent. In considering the extent and
timing of additional adjustments to the target range for the
federal funds rate, the Committee will carefully assess incoming
data, the evolving outlook, and the balance of risks.

FOMC Press conference
So remember that we coupled this decision today with the extent timing language in the post-meeting statement that signals that we are at or near a point at which it will be appropriate to slow the pace of further adjustments.

BBG *POWELL: STATEMENT SIGNALS AT OR NEAR PLACE TO SLOW, PAUSE CUTS

BBG 12/18/24
*POWELL: FED HAS BEEN MOVING POLICY TOWARD MORE NEUTRAL STANCE
*POWELL: OUR POLICY STANCE IS NOW SIGNIFICANTLY LESS RESTRICTIVE
*POWELL: CAN BE MORE CAUTIOUS AS WE CONSIDER MORE ADJUSTMENTS
*POWELL: WOULD SAY TODAY'S RATE DECISION WAS A CLOSER CALL

FOMC Press conference
>> CHAIR POWELL: There are countless models of what a neutral rate might be. Empirical models, theoretical models. And they have as many different answers as you would like. There's no real certainty. And it's a good thing to know that we don't know exactly where it is. So you're not tempted to think, oh, thing model or this estimate is right. You just have to be open to, you know, the empirical data that are coming in and how it's affecting the outlook. And it's not made easier by the fact that our policy works with long and variable legs. Nonetheless, that is the job we have so we're, I think we need -- it's appropriate for us now to proceed cautiously now that we're a hundred basis points closer to neutral. And we'll do so. Meanwhile, the economy seems to be in good shape. And these cuts will certainly help to support economic activity and the labor market while we can still make progress on inflation because policy is still meaningfully restrictive.
Read Full Report
December 08, 2024
SGH Insight
The Fed will almost certainly cut rates at next week’s FOMC meeting. Employment rebounded in November as expected but not to an extent that would elicit concerns from Fed officials, especially considering the soft household survey results. Moreover, we doubt this week’s inflation data will derail a rate cut.
Market Validation
Bloomberg 12/11/24
US Treasuries gained and traders boosted their bets on a Federal Reserve interest-rate reduction this month after a report showed consumer prices last month accelerated in line with expectations.
Yields on two-year notes, which are most sensitive to two central bank’s policy, reversed earlier increases to fall as much as three basis points to 4.12% on Wednesday. Traders priced in about 23 basis points worth of easing at the Fed’s December meeting, compared to 20 basis points prior to the report. Markets now see a roughly 92% probability the Fed will lower its benchmark by a quarter-point next week.
Read Full Report
December 06, 2024
SGH Insight
The Bank of Canada (BOC) is tilting toward another 50-basis-point rate cut next week after the latest unemployment data saw a large jump in the unemployment rate, reflecting downside momentum in underlying economic weakness.

Fearful that holding rates at an overly restrictive level would cause demand destruction that leads to inflation falling too far and fast, the Bank used its October 23 forecast round meeting to deliver a jumbo rate cut to 3.75%, largely declaring its inflation battle won and pivoting to concerns about downside risks.

The Bank’s dovish posture was evident following its last meeting with Macklem saying at his press conference that if the economy tracked broadly to the Bank’s projections it would be reasonable to expect more easing.

Macklem said the timing and pace of further reductions would be assessed meeting-by-meeting.

While that guidance did not signal another large cut might be in the offing in December, we view the data since on balance, as likely to have disappointed the Bank’s expectations.
Market Validation
Dow Jones -- OTTAWA 12/11/24
For the second time in a row, the Bank of Canada cut its main interest rate by a half-percentage point, saying lower rates are needed to address weaker-than-expected growth and a softening labor market.
In its final decision of 2024, the central bank lowered its target for the overnight rate to 3.25% from 3.75%, marking the fifth straight reduction in interest rates. The benchmark interest rate sat at 5% at the start of 2024. This also marks the first time excluding either a recession or extraordinary events -- notably the Covid-19 pandemic, the 2008-09 financial crisis, and the Sept. 11, 2001 terrorist attacks -- that the central bank has delivered back-to-back half-point cuts.
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December 01, 2024
SGH Insight
We expect Fed speakers will firm up expectations for the December FOMC meeting this week ahead of the blackout period. We anticipate speakers will guide toward another 25bp rate cut this month before slowing down the pace of rate cuts with a January skip that could become a pause if the labor market firms and inflation stalls.

The highlight of the week is the November employment report. Expectations are low with market participants anticipating only a 200k increase in nonfarm payrolls which when averaged with October would be a gain of only about 100k per month, not disastrous but not exciting either. A downside surprise would push the run rate of job growth below 200k, which would call into question the strength of the labor market and raise the risk of more rate cuts in 2025 than market participants currently anticipate. Also watch the unemployment rate for an upside surprise; the unemployment rate was 4.14% in October, very close to being rounded up to 4.2%.
Market Validation
Bloomberg 12/2/24
Rates traders are heeding the message from Fed Governor Christopher Waller and have boosted the expected probability of a quarter-point rate cut this month to around 68%, from 59% at the end of last week. What’s more, the outlook for three reductions over the next year on a cumulative basis has once again firmed up.
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Remember that Waller has been regarded as an important bellwether for the central bank since late November last year, when he indicated a shift in his usually-hawkish stance to a more dovish one. That change kicked off a wave of bets that the Fed’s next move would be to lower borrowing costs, which were proven prescient.

( BBG) 12/06 13:30 *US NOV. UNEMPLOYMENT RATE 4.2%; EST. 4.1%
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November 24, 2024
SGH Insight
Bottom Line

The Fed has positioned itself to slow the pace of rate cuts, and we think tactically it is anticipating that slowing will occur after the December FOMC meeting. We can’t guarantee that outcome; the direction is such that the momentum could build in favor of a December skip, although that outcome seems to require more confidence that the Fed is done cutting rates whereas speakers seem confident in the need for further rate cuts. Speakers won’t leave market participants completely in the dark going into the blackout and will likely firm up the guidance in early December.
Market Validation
Bloomberg 12/2/24
Federal Reserve Governor Christopher Waller said he’s inclined to vote for another reduction in interest rates when officials meet later this month, though data due before then could make the case for holding them steady.
“At present I lean toward supporting a cut to the policy rate at our December meeting,” Waller said in prepared remarks at a conference on the Fed’s framework review in Washington sponsored by the American Institute for Economic Research. “But that decision will depend on whether data that we will receive before then surprises to the upside and alters my forecast for the path of inflation.”
Waller said recent data had raised concerns that inflation may be stalling above the 2% target but added “there is no indication” that prices in key service categories should remain at their current levels or increase.
“I believe the evidence is strong that policy continues to be significantly restrictive and that cutting again will only mean that we aren’t pressing on the brake pedal quite as hard,” Waller said in the text of his remarks. “Another factor that supports a further rate cut is that the labor market appears to finally be in balance, and we should aim to keep it that way.”
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