A New Phase in Macro Policy: Ready Position (original) (raw)
Berkadia
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Published Jan 23, 2025
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A Shift in Macro Policy: Entering a New Phase
The pace of rate adjustments is slowing—are we entering a "pause" phase?
December's Core CPI shows improvement, offering optimism for markets.
Strong job growth and a steady unemployment rate suggest the labor market is stabilizing.
The Federal Reserve is starting 2025 with a flexible approach to macroeconomic policy. The focus has shifted away from the "hard landing" versus "soft landing" debate of 2024. Instead, the Fed is now in what could be called a "ready position," a term borrowed from sports to describe being balanced and prepared to respond quickly. This posture allows the Fed to adjust rates—whether cutting, hiking, or holding steady—based on real-time economic data, including inflation, labor market conditions, and financial stability.
The Fed has successfully navigated the economy through the post-Covid inflationary period without triggering a severe downturn. After years of monetary tightening, inflation has moderated, the labor market remains robust, and the Fed has effectively "landed the plane." Following the December rate cut, the Fed appears inclined to hold rates steady for now, monitoring how the economy evolves. Current projections, as reported by Bloomberg, suggest only a 3% chance of a rate cut at the upcoming January FOMC meeting.
The December Consumer Price Index (CPI) report brought encouraging news. Consumer prices rose less than expected, driven by declines in hotel rates, medical care services, and modest rent increases. Shelter costs, a key component of services, rose by 0.3% for the second consecutive month, with smaller gains in Owner’s Equivalent Rent and Rent of Primary Residence. Core CPI, which excludes food and energy, increased by just 0.2% month-over-month—the first notable slowdown in six months. This easing inflation data provides the Fed with renewed confidence in its progress toward the 2% inflation target.
Labor market data released last Friday further bolstered confidence in the economy's resilience. The U.S. added 256,000 jobs in December, far exceeding expectations of 155,000, while the unemployment rate dipped to 4.1% from 4.2%. December’s job growth was the strongest since March, alleviating concerns about labor market weakness that emerged in late 2024. The robust jobs report suggests the economy is entering 2025 on solid footing.
Despite labor market strength, mixed signals on inflation have created uncertainty around the timing of future rate cuts. Federal Reserve Governor Christopher Waller indicated that additional rate reductions could occur in the first half of 2025 if inflation continues to trend favorably. While he did not rule out a potential cut as early as March, Waller emphasized that the Fed’s decisions will remain data-dependent. He expressed optimism that inflation could return to the 2% target sooner than anticipated if the current disinflationary trend persists. For now, the Fed remains flexible, ready to adjust policy as new economic data emerges.
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