Hawkish Fed Could Upend Equilibrium

Dr. Jeffrey Roach, LPL’s Chief Economist, discusses the implications of the Fed’s latest decision on the dollar, other central banks, and the housing market.

Last Edited by: LPL Research

Last Updated: December 20, 2024

Transcript

Jeffrey Roach:

Hi, I am Jeffrey Roach, Chief Economist for LPL Financial, with an update on what's new in the macro landscape and a call to action for investors. First, recalibrated Fed policy will support the dollar. The Fed will not cut rates as much as initially expected. The extent and timing of policy adjustments is code that the Fed is unsure about the future path of interest rates, given the strength of the U.S. economy. The biggest surprise was the upward revision to inflation next year. Fed officials project a two and a half percent inflation rate by the end of 2025, and that's up from 2.1% forecast in September and most likely reflecting uncertainty from potential trade wars. Not necessarily getting the airtime it deserves, but the Fed says it will reduce the rate it pays lenders using the overnight repo facility by 30 basis points, effectively lowering the rate by five basis points relative to federal funds target range.

Jeffrey Roach:

A Hawkish Fed amid more Dovish global central banks will provide upside for the U.S. dollar in the coming year. Second, the Hawkish fed could upend equilibrium. As you see in this chart, global central banks have never been more synchronous this past year. Of course, that's excluding the Bank of Japan with its incredibly accommodative policy and subsequent weak performing currency. So one thing markets will have to deal with in 2025 is the potential for the Fed to pause policy adjustments while other major global policy rates continue to step downward. Third, housing construction is mixed. Housing starts fell 1.8% in November, but that's a misleading indicator for single-family activity. Multi-family construction activity plummeted, pulling the headline figure down, but single-family housing starts rose to a little bit above 1 million units annualized remaining above that mark in January 2020. What we know is builders cut back multi-family projects after massive activity in the years immediately following the COVID shutdowns Bottom line, the increased supply of single-family homes coming to market should improve housing affordability in the new year, especially if mortgage rates fall. Residential investment, a line item in the GDP report, will not likely add to growth in Q4. Now that's all for now, but if you want more insights on global market trends, follow us on social media and take care.

Dr. Jeffrey Roach, LPL’s Chief Economist, discusses the implications of the Fed’s latest decision on the dollar, other central banks, and the housing market.

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