Leitmotif 4: The Fed sheds cred

Seeds of doubt have been sown and could grow rapidly

An erosion of Fed credibility was one of my base-case Leitmotifs for 2024. The sharp steepening of the US yield curve that began with the Fed’s September policy error resoundingly validated my prediction. Yet, despite a firm warning from the bond market, above-forecast and reaccelerating growth, persistent inflation – also among my Leitmotifs for 2024 – the Powell Fed compounded September’s error with further cuts in November and December that contradicted their own forecasts. For the coup de grâce, backend yields climbed throughout Chairman Powell’s disastrous yearend press conference.

Just as credibility must be earned through consistent merit, its loss is a process, not an event. Like a seed cast into hard but fertile soil, the first doubts are difficult to sow, but once sown they grow rapidly. That makes 2025 a crucial year for Fed credibility with implications that span asset markets.