Hawkish cut, on the slow road to 3 percent
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Why did the Fed cut rates and how did markets react to the surprise move?
The Fed has cut interest rates as expected and they've halved the number of cuts they expect next year and lifted the long run Fed fund rate. So could th 3% actually be where they settle? And next the Bank of England and the Bank of Japan, it's a central bank triple play today. It's Thursday, it's the nineteenth of December 2024. It's the morning call from DAM. Good morning. Well, massive moves this morning in US equities at the close. I mean they were looking fairly positive ahead of the Fed, but that has all changed since. So at the close, look at this three point six percent down for the Nasdaq, three percent down for the S P and the Dow closing down two point six percent. The Russell two thousand down four point four percent this morning.
All seems a bit extreme, doesn't it? And as the Fed was just about to make its announcement, the US dollar was Up a little, now it's up almost 1.2%. That's pushed the Aussie down 1.7% this morning, down to 62.3 US cents. The Kiwi dollar down a similar amount. In fact, it was down to the lowest level even before the Fed spoke. The yen and the Canadian dollar down 0.8%. And as you'd expect, movement in bonds, 10-year Treasury is up nine basis points, up three basis points for 10-year Gilts before the Fed this was Aussie 10 years down two basis points yesterday. Yesterday to four point two eight percent, up eleven basis points this morning on futures and shares. Well, they closed mostly up in Europe, but of course that was before, well before the Fed.
The FTSE one hundred closed just in the green, the Eurostocks fifty up naught point three percent, the DAX closed ever so slightly in the red. And oil that was higher for most of the session has also turned round sharply, and so now it's down again 0.5% off Brent, down to seventy two eight. Bitcoin incidentally down four point five percent today as well. So there we are. So let's talk Fed. Here's Nab's Gavin friend in London. So uh twenty five basis point cut. No surprise there. That's what the markets had priced in. Just two cuts next year, not four. So I guess hawkish cut, that's the expression, isn't it?
Yeah, good morning, Phil.
What does the new Fed dot‑plot reveal about future rate cuts and the neutral‑rate target?
Well, uh I guess so. I mean it's it's pretty much what the market uh was expecting, I think. Um there was one dissenter. Um Who uh uh uh Beth uh Hamak who preferred to to keep rates unchanged. Um the focus was always gonna be, I think, on on the me on the dot plot. Um the median dot, as you say. Yeah. You recall, uh we had four cuts um as at the September meeting for next year. That's now cutting half, as you say, to two cuts. So a median dot of three point nine from three point four. For twenty twenty six the median dot is now three point four from two point nine and in twenty twenty seven the median dot is three point one from two point nine. So in essence the Fed has pushed the cuts out down the curve. And we get I mean let's call it uh three percent, three point one percent.
Um in the longer term in twenty twenty seven. Actually the longer term did nudge up uh ten basis points. Not um not much, but that just tells you about the direction of travel that we're going here, doesn't it?
But is that that's what they're seeing as the long run that that's the neutral rate in effect they're saying.
Indeed, indeed it is. Indeed it is. Um and so, you know, whether this is because it's a reflection of the strength of the economy as it is and the resilience and they see it continuing, whether it is a reflection of what they think is going to come down from Tre uh President Trump. I mean, you know, th Powell will Powell is always very clear to say that policies, the the things they're going at the moment are on stuff they know that's baked in uh rather than the speculation. But it's very difficult from a behavioural point of view when you're asking individual FMC members to come up with your rate track for the next few years, not to bake into that some sort of, you know, view of where you think he's going given
All the policy pronouncements that we that we've seen, even if they're not actually Well particularly
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Chapters
8 chapters
1
Why did the Fed cut rates and how did markets react to the surprise move?
0:01–1:58
2
What does the new Fed dot‑plot reveal about future rate cuts and the neutral‑rate target?
1:58–4:19
3
How are inflation forecasts and labour‑market trends shaping the Fed’s longer‑term outlook?
4:19–7:16
4
Why is the Bank of England expected to keep rates on hold despite UK CPI data?
7:16–9:50
5
What are the expectations for the Bank of Japan’s policy and the possible January hike?
9:50–12:00
6
How is New Zealand’s economy performing and why is a second quarterly contraction likely?
12:00–14:17
7
What does the mixed global data mean for investors heading into 2025?
14:17–16:28
8
What are the key takeaways and what’s coming up in the final podcasts of the year?
16:28–18:30