Hawkish or Dovish? Exploring Clues from FOMC Minutes and Upcoming Economic Data

The minutes from the Federal Reserve's November meeting have been released, and the upcoming PCE price index and GDP data are expected to provide the latest clues regarding the Fed's interest rate outlook.

According to the Federal Reserve's latest release of the November FOMC Minutes, Federal Reserve official expressed a tendencyfor "gradual" interest rate cuts in the future, with a possibility of pausing. Fed officials generally support a cautious approach to future rate cuts as long as the economy remains robust and inflation continues to cool slowly. Some officials have indicated that if inflation persists at elevated levels, the Fed might consider pausing rate cuts and maintaining borrowing costs at restrictive levels. Others noted that should economic conditions or the labor market deteriorate, rate cuts could be accelerated. Notably, the discussion did not address the potential impact of Trump's election on future policy direction.

Currently, Wall Street anticipates that the soon-to-be-released inflation data may indicate that price pressures in the U.S. remain stubbornly high. If the October PCE data exceeds market expectations, coupled with concerns over the inflationary impact of Trump's tariff policies, the market may increase its pricingfor secondary inflation.in more persistent inflation. Additionally, the third-quarter GDP data will be closely watched to determine whether consumer spending continues to make a strong contribution to GDP. Should both reports come in above expectations, U.S. Treasury yields could face upward pressure, potentially putting strain on risk assets in the short term.

Economists of Bank of America Securities believe that if core PCE reports two consecutive readings of 0.3%, it would certainly lead the Federal Reserve to reassess its policy outlook. That said, we still expect the Fed to cut rates by 25 basis points in December. However, with the resilience of economic activity and persistent inflation, the risks appear to be leaning toward a reduction in the rate-cutting cycle. Notably, investors have lowered their expectations for Fed rate cuts over the past few weeks. According to data from the CME FedWatch Tool, the market now sees roughly a 37% chance that the Fed will keep rates unchanged at the upcoming December meeting, compared to just 24% a month ago.

Given the recent strong economic data, persistent inflation, and the potential adverse effects of Trump's tariff policies on the outlook for inflation, the prospect for a rate cut in December remains uncertain. However, the significant debt burden facing the U.S. government is likely to influence the Fed's decision-making. The Fed will continue to update its policy choices while balancing employment objectives, inflation targets, and debt pressures.

Source: CME FedWatch Tool