Fed on repeat, but the world has changed

Today's Fed meeting (Wednesday, December 10) bears many similarities to last year's. Two major differences are that there's a different president in the White House and that the currency market has positioned itself for a dollar decline.

Today, the US central bank will make a decision on the policy rate. All indications are that the meeting will be a carbon copy of the one a year ago. Back then, the Federal Reserve announced a 0,25 percentage point rate cut. And just like then, the rate has already been lowered twice this fall. Traders are now pricing in a 90% chance of a policy rate cut – just as happened at the meetings in mid-September and late October. Another similarity with twelve months ago is that in both cases, policymakers were anticipating two additional rate cuts in the new year. Yet, there is a significant difference compared to the end of 2024.

Big difference in twelve months
At the time, Joe Biden was still President of the United States and Donald Trump was about to enter the White House. Now, Trump's policies are increasingly making themselves felt in the world of interest rates and currencies. It's only a matter of days—at most weeks—before he appoints a successor to Fed Chairman Jerome Powell. In August, he appointed confidant Stephan Miran as a director at the central bank. This appointment was quickly reflected in the interest rate forecast. This is displayed in a so-called dot plot: a collection of dots where each dot represents the Fed director's expectation of where the policy rate will be at a given moment. In the previous dot plot, one dot was much lower than the others. It's not hard to guess that this was Miran's prediction.

Trump gets his way
Trump is insisting that interest rates must fall, giving the US economy more room to grow. While he's highly likely to get his way on Wednesday, it remains to be seen whether Powell is anticipating more rate cuts in 2026. The Federal Reserve aims for full employment—which is, of course, easier to achieve when the economy is performing well—and inflation of 2%. Between April and September, inflation rose from 2,3% to 3%. Due to the US government shutdown, no new figures have been released for two months. It would be naive to think that the rise of recent months has magically turned into a decline.

End of year print?
Since the turn of the year, the dollar has lost more than 11% against the euro. With the prospect of Kevin Hassett – known as a strong advocate for lower interest rates – likely being appointed as the new Fed chairman, this picture isn't likely to change anytime soon. But Powell isn't gone yet. If he hints that further rate cuts will be delayed, that will give the dollar some breathing room. Despite all the similarities with twelve months ago, a major difference is that many market participants have already positioned themselves for a weaker dollar rather than a stronger one. If the Fed pauses for now, some of these positions may need to be hedged. That would give the currency another boost. Despite the clear headwinds, the dollar could very well embark on a year-end sprint.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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