FED: FedSpeak Takes Decidedly Hawkish Turn This Week (1/3)

FOMC speakers this week generally adopted a more cautious tone on rate cuts than expected. Most of the key commentary was delivered after Wednesday's CPI release, which while bringing below-expected sequential Core and Supercore data, combined with the PPI data Thursday to point to an acceleration in core PCE (albeit modest, to closer to 0.30% vs 0.25% in September). 

• The "cumulative effect" of hawkish Fedspeak and the slight upside in core PCE from CPI/PPI (with a helping hand from solid initial jobless claims among other data) saw a significant shift in rate cut pricing. The December meeting appears to be "live", nearing 50/50 implied probability of a hold at one point Friday morning, versus closer to 20% at the start of the week. Cumulative pricing through end-2025 pared 8bp from the path this week: now 74bp of cuts is seen, vs 82bp prior. And there's now less than one full 25bp cut seen through the next two meetings (23bp total by the January FOMC).
• There were two major shifts in FOMC tone this week: one is that the very word "pause" was introduced as a possibility by a senior FOMC member and erstwhile dove (Kugler); the other is that there is growing concern over the implications of longer-end rates. We go into both shifts in detail in the following notes.
• Neutral rate-talk also dominated, and in a hawkish direction. We get the sense that last week's FOMC discussion included some estimates of the neutral rate (note the stir created by Dallas Fed's Logan yesterday over perhaps already having reached neutral), as well as starting to talk about the circumstances for slowing or ending the rate cut cycle (Powell at the press conference: "we reach a point where we slow the pace...it's something that we're just beginning to think about".)
• It's probably still the case that they are still in the early stages (we would characterize this in Fed parlance as "thinking about thinking about slowing rate cuts"), which means a December cut is the default.
• But some of the groundwork for a less dovish rate cut path appears to have been laid since the US election (the potentially hawkish implications of which, FOMC members didn't venture into).