Market Wire: Fed Out-Hawks Markets, Adds Upward Momentum to Dollar

As had been widely anticipated, the Federal Reserve cut its benchmark borrowing rate by a quarter percentage point this afternoon, while also telegraphing a dramatically slower pace of easing in 2025. The Federal Open Market Committee voted by an 11-to-1 margin to lower the target range for the federal funds rate to 4.25 to 4.50 percent, with the Cleveland Fed’s Beth Hammack dissenting in favour of a hold.

In the statement setting out the decision, officials made only one major change that we can see: in place of a sentence that previously said “In considering additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks,” new language was inserted that reads “In considering the extent and timing of additional adjustments”. This could be interpreted as setting the stage for a pause at the central bank’s January meeting.

According to the accompanying “dot plot” Statement of Economic Projections, the benchmark federal funds rate is now expected to end 2025 at around 3.9 percent—a level that implies just two 25-basis point reductions next year, fewer than the four expected in September, and more aggressive than markets had anticipated. The policy rate is then seen falling to 3.4 percent in 2026, and 3.1 percent in the following year. The long-run projection climbed to 3.0 percent from 2.9 percent previously - suggesting that policymakers see structural changes lifting “neutral rate” estimates.

Under the updated forecasts, the core personal consumption expenditure price index is seen rising 2.8 percent next year - higher than the 2.6 percent previously estimated. Unemployment is expected to end 2025 at 4.3 percent, down from the 4.4 percent estimated under the previous projection. Growth expectations were raised slightly, with the economy seen expanding 2.1 percent in 2025, up from 2 percent previously.

Initial price action in financial markets looks consistent with a relatively-hawkish interpretation of the Fed’s reaction function in 2025, with Treasury yields pushing higher, equities retreating, and the dollar advancing against its major counterparts. Complex interactions between the language in the statement, the signalling embedded in the dot plot, and Chair Powell’s guidance in the post-decision press conference could see more nuance emerging over the next two hours—and much depends on the incoming administration's policy choices next year—but for now, the Fed’s policy stance looks set to keep a powerful tailwind behind the greenback.

The press conference will be live-streamed here

Read the 2025 Currency Outlook from Corpay Currency Research