Fed critics — and here I mean critics concerned about the proper course of monetary policy, not those “concerned” about staffing levels — worry that, at least prior to the hawkish lean that accompanied this month’s rate cut, Jerome Powell and friends were insufficiently attentive to still-percolating inflation in the US.

The story goes like this. In early August, the Fed (and markets) were spooked by a lackluster jobs report (and an uptick in the UNR that triggered the Sahm Rule), prompting an aggressive dovish pivot which culminated in September’s proactive 50bps rate cut. But subsequently, revisions to the BEA’s income series and resilient labor market data suggested the growth scare was in fact a false alarm. Meanwhile, consecutive warm core CPI/PCE updates elicited consternation about the disinflation path.

After 100bps of rate cuts over three meetings, the Fed appeared to tacitly agree that inflation was too stubborn for comfort, particularly given a still sturdy labor market. And, so, the December rate cut was paired with a dot plot that tipped 50bps fewer cuts for 2025. During the press conference, Powell told Steve Liesman the “recalibration” of policy which began with September’s cut was mostly complete.

The figure shows you market pricing for 2025 easing. As you can see, it’s come in quite a bit. Headed into the holiday, markets were priced for just 37bps of cuts in 2025, which is to say one quarter-point cut fully priced and a second at roughly even odds.

For his part, Goldman’s Jan Hatzius thinks the market’s now overshooting to the hawkish side, and that’s even considering the bank’s rosy growth outlook for the US. Hatzius expects 75bps of cuts next year, and said in his latest, published just before Christmas, that “reports of a rebound in underlying US inflation have been greatly exaggerated.”

Why does he say that? Well, for one thing, the annualized pace of core PCE price growth is 2.5% over the past three months, which he noted is just “a bit above the 2.3% seen over the prior three months,” but still below the 12-month rate, “still consistent with ongoing disinflation” and, not coincidentally, in line with the Fed’s new 2025 SEP forecast. The figure on the left, below, also shows the Dallas Fed’s trimmed-mean metric, which Hatzius called “a good statistical measure of the underlying trend.” It ran 2.4% annualized over the past three months.

At the same time, and as the figure on the right shows, the bank’s wage tracker is now below 4%. On Goldman’s math, as long as productivity grows somewhere between 1.5% and 2%, wage growth at 4% or cooler is consistent with 2% overall inflation.

Hatzius also seemed to suggest investors adopt a healthy bit of skepticism when it comes to sundry “bulletproof labor market” narratives. To be sure, the US economy’s strong (“exceptional”), but Goldman reminded markets that the unemployment rate nearly rounded up to 4.3% in November, matching the cycle high which triggered the growth scare mentioned here at the outset.

In addition, Hatzius wrote that “the prime-age employment to population ratio has fallen by 0.5ppt in the last two months, and the job finding rate has plummeted.” The household survey, he went on, “is noisy, and our best guess is that the December release due on January 10 will look better [but] any significant deterioration from here would strengthen the case for additional rate cuts in 2025.”