💵New macroeconomic forecasts point to a more hawkish Fed stance
Interest rates in the US were cut as expected to 4.5%, while macroeconomic forecasts and interest rate expectations changed quite noticeably. The Fed is also changing its communication somewhat in the statement, and one Fed official (Cleveland Fed president, Beth Hammack) is holding off on the decision to cut.
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Open account Try demo Download mobile app Download mobile appQuite a bit of change in macroeconomic forecasts. We can see higher assessments of inflation, slightly higher assessments of economic growth and a markedly higher outlook for interest rates. Source: the Fed
The Fed's statement indicates that it is considering a longer period of time before its next decision to adjust interest rates. The committee will carefully evaluate incoming data, the changing outlook and the balance of risks. The Fed explicitly raises interest rate forecasts:
- 3.9% for 2025 (up from 3.4%)
- 3.4% for 2026 (up from 2.9%)
- 3.1% for 2027 (up from 2.9%)
- 3.0% for the long term (up from 2.9%)
- The Fed raised its 2025 GDP growth target to 2.1% y/y from 2% in September
- It also significantly raised its forecast for PCE inflation in 2025; it estimates it at 2.5%, up from 2.1% in September (before the election). The baseline is expected to be 2.5%, it was previously expected to be 2.2%
- The unemployment rate in 2025 is expected to be 4.3%; the Fed previously expected 4.4%. So the Federal Reserve does not see a significant increase in unemployment from current levels.
- The Fed also raised the long-term rate to 3% from 2.9% previously, and estimates a 50 bp cut in rates next year and in 2026
The tone of the projection is very hawkish, and seems to support the narrative of no, or very few, rate cuts in 2025. It is worth noting, however, that circumstances could still change, the Trump administration will take office in the US, in the second half of January. If the tariff policy turns out to be as 'aggressive' as Trump sees it, the dollar seems to have even more room to rise.
In response, we have seen a very strong decline in the EURUSD pair, which started its declines from levels near 1.0500, while levels near 1.0400 are now being tested. There has also been a clear limit to the rise on the US500. If further forecasts point to greater inflation risks, there is a chance that today's cut was the last, which strengthens the potential for the EURUSD pair to fall near parity next year.
EURUSD could close today at its lowest since 2022. Nevertheless, there is still a press conference ahead. Source: xStation5
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