Former Fed Chair Ben Bernanke once described monetary policy as “98% talk and 2% action.” The last Fed meeting of 2024 embodied this perfectly. The FOMC delivered its 2% with a 25 basis point rate cut, while the remaining 98% came through Powell’s press conference, which triggered the sharpest jump in yields post-Fed announcement since 2013.

At this meeting, Powell adopted a peak hawkish tone, calling the rate cut a “close call.” This led to a bond market selloff immediately following the cut, pushing mortgage rates higher to close out the year. While the recent cuts lowered the front end of the yield curve, expectations for future policy drove the long end higher. This steepening of the curve came at the expense of higher mortgage rates. We could blame the Fed and forward guidance for the pullback in the bond market, but it all comes down to one thing – uncertainty. 

Uncertainty explains why yields have risen despite 100 basis points of cuts. The chart below illustrates this shift, comparing the September yield curve (purple line) with the curve after December’s cut (orange line).

In 2023, the Fed’s final meeting of the year delivered a surprise dovish tone from Powell, which sent bonds rallying. Markets felt confident about the rate path and began abandoning the “higher for longer” mindset. Fast forward a year, and Powell gave us the opposite: his most hawkish stance of 2024.

It’s hard to blame the market for reacting to the Fed’s dot plots. But the uncertainty created by these projections and forward guidance has arguably fueled unnecessary volatility. This year, the Fed’s 98% talk has given us another rollercoaster for mortgage rates, ending 2024 on a high note.

Now let’s turn to the 2%—the action taken by the Fed in December. The FOMC raised rate projections by 50 basis points for the next two years and adjusted the long-term rate higher, driving a spike in the 10-year Treasury yield.

Why the shift in sentiment since September? The answer lies in a combination of factors: a strong labor market, robust economic growth, and lingering concerns about inflation in 2025. Inflation is back in the spotlight, taking precedence over labor market data.

Typically, the Fed avoids factoring in future policy implications under a new administration until those policies are clearer. However, the December meeting broke from tradition, with Powell expressing higher inflation expectations tied to potential shifts in fiscal policy.

While December’s dot plot triggered an unexpected market pullback, history suggests this will fade. Markets will inevitably find new developments to focus on, leaving this dot plot as just another footnote in the ongoing narrative of monetary policy.