Shorter-term metrics show how close the Fed is to reaching its target

There is plenty of optimism about the US economy and the stock market in 2025, especially with the potential for a big corporate tax cut but the biggest source of optimism should be from the Fed.

They have plenty of dry powder with rates at 4.25-4.50% and inflation is coming down.

Core PCE y/y is at 2.8% and headline is at 2.6% but short-term readings highlight that the trend is lower, especially when combined with real-time metrics like falling rent.

On core inflation, the 6-month annualized rate ticked down to 2.3%, the lowest in 2024 while the 3-month annualized rate dropped to 2.2% from 2.6% in November.

On the headline side, the 6-month annualized rate was 2.2% (vs. 1.9%), while the 3-month annualized rate was 2.5% (vs. 2.2%). Those ticked up on base effects and energy but aren’t problematic numbers.

At the same time as the PCE data, we also got a speech from the Fed’s Bowman, who is the biggest hawk among Fed governors. Despite her stance, she said she still expects rate cuts this year.

Add all that up and market pricing for Fed cuts moved up to 50 bps this year from 47 bps today.

Now there are a world of concerns and uncertainties around politics but if you ignore all of that, the Fed is sitting in a wonderful position — maybe the best position it’s been in since the financial crisis. It has a good economy, slowly declining inflation that’s only modestly above target, and abundant dry powder.

If the US economy was ever faced with some kind of shock, it could easily cut 200 basis points and still have plenty of ammunition left. That’s a strong Fed put for risk assets.

S&P 500 futures are up 22 points, or 0.4%.

This article was written by Adam Button at www.forexlive.com.