The core tension in markets recently is not whether rate cuts will occur, but whether policy patience can withstand the drag from weakening marginal data. Both Cleveland Fed President Loretta Mester Hammack and Dallas Fed President Lorie Logan—voting members of this year’s FOMC—have delivered distinctly hawkish signals, emphasizing that interest rates may need to remain unchanged for an extended period and that further hikes cannot be ruled out if necessary. This reflects official concern that the risk of renewed inflation still outweighs worries about slowing growth.
Hammack stated clearly that after three consecutive rate cuts by the end of 2025, the current environment favors observing the effects of existing policy rather than making incremental adjustments. She also noted that upside and downside risks to rates are now broadly balanced. Logan echoed this view, arguing that maintaining current rates remains appropriate unless the labor market shows “material deterioration,” and stressing that inflation persistence is a greater concern than employment weakness at this stage.
However, incoming data are beginning to undermine this hawkish narrative. US December retail sales were flat month-on-month (versus expectations of +0.4% and a prior reading of +0.6%), with declines across 8 of 13 categories—signaling a clear cooling in year-end consumer momentum. Bond markets reacted swiftly: the 10-year US Treasury yield fell to around 4.14%, while the 30-year yield dropped to roughly 4.79%, both near multi-week lows. Rate futures now price a 19.6% probability of a 25bp cut next month, alongside rising expectations for three to four cuts over the year.
This creates a clear structural dynamic: while Fed officials maintain a hawkish tone, markets are using incoming data to reassess the sustainability of a prolonged “hold” stance. In this context, near-term pricing power for rates and risk assets is more likely to rest with upcoming labor and CPI data rather than individual official remarks. Should both growth and inflation continue to soften, market expectations for a policy pivot will remain a persistent source of pressure on the official narrative.
