Fed Revises Inflation, Interest Rate Outlook Amid Policy Shifts 

The Federal Reserve has decisively determined that Trump's policies will lead to inflationary pressures. Despite the necessity of implementing a rate cut today, the Fed significantly raised its inflation and interest rate projections, aligning more closely with the market's hawkish outlook. However, even with this marked shift in policy, the unemployment rate is forecasted to remain largely unchanged from its current levels. The accuracy of these predictions will soon be revealed as events unfold.

It is worth recalling that less than three months ago, the Federal Reserve enacted a dramatic 50 basis-point rate cut, a crisis-like move. Yet, in the post-election environment, the economic landscape has shifted drastically, prompting a reassessment of monetary policy. Since the Federal Open Market Committee's meeting on November 7th, the dollar and stock markets have experienced notable rallies, while gold and oil have lagged behind. Meanwhile, the dollar has displayed periods of significant volatility, influenced by unexpected macroeconomic data.

A closer examination reveals that inflation data has consistently exceeded expectations, presenting a significant upside surprise. At the same time, hard economic data, excluding sentiment surveys, has surged since the Federal Reserve began its rate-cutting cycle. Financial conditions, despite these developments, remain as loose or easy as they were prior to the onset of the Fed's rate-hiking efforts. These dynamics underscore a complex economic environment characterized by both resilience and volatility.

Market participants had fully anticipated a rate cut at today's meeting. The expectations for rate cuts in 2025 have collapsed. This shift in expectations has led many to anticipate a "hawkish cut," a scenario where the central bank signals caution about further easing despite implementing a rate reduction.

Today's meeting also included the release of a new Dot Plot, reflecting the individual rate forecasts of Federal Reserve members. As expected, these projections have been adjusted to align more closely with the market's increasingly hawkish stance. Breaking down these projections historically reveals a dramatic shift: expectations for 2025 have surged, catching up with the two rate cuts currently priced in by the market, down from over six cuts anticipated earlier in the year. Moreover, expectations for 2026 rates have reached record highs.

The Federal Reserve also revised its inflation forecasts upward. The median projection for 2025 Personal Consumption Expenditures (PCE) inflation now stands at 2.5%, up from 2.1% in previous forecasts. This adjustment underscores the Fed's recognition of mounting inflationary pressures, likely exacerbated by Trump's policies. In summary, the Federal Reserve now anticipates slightly lower unemployment levels than it projected in September, significantly higher inflation rates, and substantially elevated interest rates. The era of a 2% inflation target appears to be over.

In terms of balance sheet policy, the statement released today did not mention quantitative tightening (QT), suggesting that the current pace of balance sheet reduction will continue. This omission leaves open questions about the future trajectory of the Fed's balance sheet policy.

The key highlights of the Federal Reserve's actions include cutting the benchmark federal funds rate by 25 basis points to a target range of 4.25%-4.50%. Additionally, the overnight reverse repo facility rate was reduced from 4.55% to 4.25%. Importantly, the Federal Reserve emphasized a data-dependent approach to determining the extent and timing of future policy moves. Notably, Cleveland Fed President Loretta Mester dissented, advocating against a rate cut.

Powell's subsequent commentary will be closely scrutinized for insights into the Fed's evolving policy stance. The redline of the statement highlights the changes and adjustments made since the previous meeting, offering a glimpse into the Fed's deliberations. As the economic landscape continues to evolve, the Federal Reserve's ability to navigate these complexities will remain under intense scrutiny.