FOMC December meeting reaction: Slow and steady in 2025

This week’s communications has made clear that FOMC members are increasingly wary about inflationary risks, particularly in light of the tariff and tax proposals under Trump 2.0.

We see no further cuts for at least the next couple of meetings, with officials to take stock and await more details of Trump’s policies, particularly his tariff plans, before even considering further rate reductions.

We think that the details of his tariffs, in particular, will be absolutely key for Fed policy in 2025. It's not beyond the realms of possibility that a set of highly protectionist policies could lead to no cuts at all next year, while a lighter touch approach could allow for a couple of rate reductions in the second half of the year.

Futures markets are now not fully pricing in the next 25bp cut until mid-2025, with only around 35bps of cuts seen throughout the entirety of next year (down from 50bps).

In view of the resilience in US consumer spending and the inflationary risks under the second Trump administration, we think that this seems entirely reasonable. This repricing triggered a sharp upward move in the dollar on Wednesday, which leapt more than 1% higher on the euro, before giving back some of its gains.