Fed's Powell discusses monetary policy amid increasing bets for further easing

• Comments from Fed Chief Jerome Powell will be closely followed midweek to get clues about the interest rate outlook.
• The Fed is seen reducing its interest rates by a quarter point at this month's meeting.
• The US labour market takes centre stage this week, with NFP due on Friday.

Federal Reserve Chair Jerome Powell is set to participate in a moderated discussion on the economic outlook on Wednesday at the New York Times DealBook Summit in New York. Investors will closely monitor his remarks, eager for any signals about future monetary policy.

The event comes at a time when markets largely expect the Fed to cut its policy rate by another 25 basis points during its December 17-18 meeting. However, this expectation lost some momentum following Powell's remarks at an event in Dallas on November 14.

During his Dallas speech, Powell indicated that the Fed could take its time before making further rate cuts. He pointed to steady economic growth, a strong labour market, and inflation remaining above the Fed's 2% target as reasons for a cautious approach. His comments aligned with the views of FOMC Governor Michelle Bowman, who has consistently advocated for a prudent stance on rate adjustments.

As of now, the probability of a 25-basis-point rate cut this month stands at approximately 75%, according to the CME Group's FedWatch Tool. However, investors anticipate no more than 75 basis points of easing over the next 12 months.

The Fed and Trump: A collision course ahead?

The return of former President Donald Trump to the White House has raised concerns about renewed inflationary pressures. His proposed policies could significantly alter the economic landscape, featuring looser fiscal measures, the reintroduction of tariffs on exports from China, Europe, Mexico, Canada, and the BRICS nations, as well as stricter immigration policies.

In fact, a new chapter in the US-China trade war has already begun. China recently announced a ban on exporting gallium, germanium, and antimony to the US - minerals critical for military technologies. This move came just one day after Washington introduced new restrictions targeting China's semiconductor industry.

While Powell has repeatedly declined to speculate on the economic impacts of potential policies under a renewed Trump administration, it's likely that any resurgence in inflationary pressures could lead the Fed to pause or even halt its current easing cycle.

Amid these developments, the US Dollar (USD) surged in October and November before entering a period of consolidation/correction. However, this pause should be temporary, leaving the bullish outlook for 2025 unchanged.