It’s Friday! The S&P 500 just snapped a three-day win streak. Today we’re unpacking why the outlook for monetary policy is so murky, the US manufacturing boom, Scott Bessent’s Senate hearing, and more. First time reading? Join 190,000 self-directed investors gaining an edge every morning. Sign up here. 

No consensus in sight

You can tell uncertainty is high when economists can’t agree on the economy. 

Over the last several weeks, nearly every bank and researcher on Wall Street has published their outlook for how the Federal Reserve will adjust interest rates in 2025. Each firm operates with the same data, yet there is nothing resembling a consensus. 

“We’ve got an unusual economic environment coming through,” James Knightley, ING’s chief international economist, told me.

Even though the Fed has eased rates by 100 basis points since September, he explained, Treasury yields have spiked and markets haven’t moved as they typically would in a cutting cycle. 

“On top of that, you’ve got uncertainty over Trump’s policy mix in terms of his tariff plan, immigration controls, and fiscal position,” Knightley said. 

The Fed’s benchmark rate currently hovers in the 4.25-4.5% range. Markets don’t expect that to change at the January meeting.

Here’s an overview of the December data that’s caused such hubbub: 

• CPI year-over-year: 2.9%

• Core CPI year-over-year: 3.25%

• Unemployment rate: 4.1%

• Nonfarm payroll growth: 256,000

And here’s what a handful of banks think that means for monetary policy: 

Notably, the consensus estimate for full-year economic growth is 2.1%.

Citi — which anticipates five rate cuts in 2025 — has a downbeat forecast for a meager 0.7% growth. Bank of America is forecasting an above-consensus 2.4% growth for the year, hence their view for no rate cuts.

ING, meanwhile, expects 2.0% growth.

The best-case-scenario for the Fed entails getting inflation under control without breaking the labor market and fueling unemployment.

The coveted soft landing. 

Yet holding rates steady or even hiking them — as Bank of America predicts may happen — risks putting the Fed too far to one side of their dual mandate.

Cutting rates, on the other hand, does the same but the risk falls to resurgent inflation. 

Confused? Don’t worry, so are the pros. 

“There are so many wild cards in play right now, it is leading to a diversity of views,” Knightley said. 

Fed Governor Christopher Waller told CNBC on Thursday that there’s still a scenario that involves more and faster rate cuts than anticipated.

In his view, three or four cuts could still be justified before the end of the year.

“If we continue getting numbers like this, it is reasonable to think rate cuts could happen in the first half of the year,” Waller said. “I am optimistic that this disinflationary trend will continue and we will get back closer to 2% a little quicker than maybe others are thinking.”

How many rate cuts do you think the Fed will make in 2025? Reply directly to this email or let me know on X @philrosenn.

Elsewhere:

🎙️ Scott Bessent took questions at his Senate confirmation hearing. Trump’s Treasury Secretary nominee sounded off on US fiscal spending, extending tax cuts, and ways to “unleash the American economy.” Still, since his nomination in November, he’s seemed to have won the approval of Wall Street. (CNBC)

📊 December retail sales missed expectations. That said, the data still suggested healthy holiday spending overall. From October through December, sales rose 3.7% compared to the same period a year ago. Retailers like Costco, Lululemon, Abercrombie & Fitch, and Nordstrom all raised their fiscal fourth-quarter guidance the last few days. (Barron’s)

📈 Manufacturing activity is picking up. The Philly Fed said Thursday that its monthly manufacturing index rose in December to its highest since April 2021. It marked the largest spike since June 2020 after factories reopened from the initial wave of COVID-19 shutdowns. This coincides with a number of other surveys that reflect a sharp upswing in business optimism and activity under Trump 2.0. (Yahoo Finance)

🏠️ Wall Street thinks the housing market is overpriced. The stock market is pricing portfolios of US homes at a heavy discount, with shares of single-family landlords Invitation Homes and American Homes 4 Rent trading well below their net asset values. If a large gap holds between property values implied by stock prices and private markets, a correction could loom. (WSJ)

Rapid-fire:

• China’s economy grew 5% in 2024, with fourth-quarter growth exceeding estimates (Bloomberg)

• Reports of weak China sales and AI struggles sent Apple stock to its worst day since August (CNBC)

• In 2024, big banks paid out the most in 3 years to shareholders in the form of dividends and buybacks (Bloomberg)

• TikTok CEO Shou Chew will attend President Trump’s inauguration (NBC)

• Thailand is weighing whether to approve its first bitcoin ETF (Bloomberg)

• Oil giant BP is axing 5% of its 90,000-strong work force (CNN Business)

• Electric and hybrid vehicles reached a record 20% of total vehicle sales in the US in 2024 (CNBC)

• Advisors to president-elect Trump are crafting a wide-ranging sanctions strategy to facilitate a Russia-Ukraine diplomatic accord while simultaneously squeezing Iran and Venezuela (Bloomberg)

Last thing:

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