FOMC Signals QT Taper and AI-Driven Inflation Risks

● Liquidity Cliff, AI Inflation Shock

December FOMC Watch Points and Powell Press Conference Checklist: The Signals that the Dot Plot, QT Inflexion, and AI Power Demand Give to Inflation and Interest Rates.

Today’s article contains three things.
How to read the dot plot and statement wording in 3 minutes.
Ten sentences in Powell’s press conference that truly move the market.
And the ‘key to liquidity (QT, RRP, reserves)’ and the ‘structural impact of AI power demand on inflation and interest rates’ that most news outlets overlook.
The meeting results will be released shortly, but even right before the disclosure, you can get a complete overview of the global economic outlook and asset price trajectories with this framework.
The impact from the Fed’s signal will spread widely—from interest rates and exchange rates to stocks, bonds, and commodities.

Headline Summary: What Will Be Released Tonight and What to Read Immediately.

Tonight at the December FOMC, the policy rate decision, statement, economic projections (SEP), and dot plot will all be released simultaneously.
The dot plot is key to gauging the interest rate path beyond next year and the neutral rate (r). In Powell’s press conference, signals of a shift in policy tone, intentions to adjust QT (quantitative tightening), and the tone regarding labor market and inflation assessments will steer the market. The four immediate check points are as follows. Whether the statement’s risk balance assessment has shifted from inflation to employment. Whether the dot plot shows an upward revision of the long-term dot (r) and what the expected interest rate path is for 2026–2027.
The core PCE inflation path in the SEP and the realism of the unemployment rate assumptions.
Comments on the ‘adequacy of reserves’ after QT pace adjustments or RRP depletion.

Statement Wording Checklist: One Sentence Can Move the Dollar and Exchange Rates.

Determine whether the policy tone is dovish or hawkish.
If the language expressing confidence in curbing inflation is strengthened, it tends to lead to a weaker dollar, lower long-term rates, and stronger growth stocks.
If there is no mention or a weaker hint of “further tightening,” bets on rate cuts could spread.
If the risk balance shifts from inflation to employment, concerns of an economic slowdown increase, but there could be short-term benefits for risky assets.
Since exchange rates are highly sensitive to a single word in the wording, Korean investors should pay close attention to the initial reaction of the KRW/USD pair.

How to Read the Dot Plot (Dot Plot) and SEP: Focus on ‘Structure’ Rather Than Numbers.

The top priority is the movement of the long-term dot (r). An upward revision of r limits the downside of long-term interest rates and constrains the valuations of growth stocks.
How much the median for 2026–2027 reflects a rate cut will determine the sustainability of the expansion of stock multiples.
If the core PCE path is projected to settle in the low-to-mid 2% range over the long term, the pace of rate cuts might be gradual.
If the unemployment outlook is set low, it suggests a high probability of a “soft landing,” but it also implies the risk of a secondary wave of wage-price spirals.
If growth projections are lowered along with inflation, the combination of stronger bonds and a weaker dollar is reinforced.
Conversely, if growth remains robust and inflation is sticky, the yield curve might steepen.

10 Sentences to Catch in Powell’s Press Conference.

Whether there is an explanation regarding the threshold for a change in policy tone.
Whether, within the ‘data-dependent’ principle, there is a concrete standard for additional signs of downward inflation.
Whether the cooling of the labor market is linked to structural factors (immigration, productivity, AI adoption).
How changes in financial conditions (stocks, spreads, the dollar, interest rates) weigh into policy responses.
Whether there is any mention of adjusting the pace of QT or the possibility of an early taper.
Comments on the RRP balance reaching a bottom and plans for managing the ‘floor system’ to ensure bank reserve adequacy.
Any adjustments to the reinvestment ratio of Treasuries relative to MBS.
How interactions with Treasury refunding and QRA are viewed.
Any comments on the uncertainty surrounding the neutral rate and the impact of long-term productivity/AI on r*.
Any shift in the perception of the U.S. inflation path through the exchange rate channel amid a global economic slowdown.

Roadmap for Market Reactions by Scenario: Prepare Your Trading Plan in Advance.

Dovish cut signals.
If the dot plot suggests more cuts and the statement becomes dovish, it tends to lead to lower long-term rates, a weaker dollar, and stronger Nasdaq performance.
The Korean stock market may see relative strength in semiconductors and internet stocks, with downward pressure on the KRW/USD pair.
Hawkish stuck signals.
If price concerns are heightened and r* is revised upward, long-term interest rates could rebound, favoring defensive sectors such as value stocks, energy, and banks, with adjustments in growth stock valuations.
This scenario may lead to upward pressure on the KRW/USD pair and increased volatility in the KOSPI.
Reacceleration of QT or ‘liquidity tightening’ signals.
A scenario where long-term Treasuries weaken, credit spreads widen, and adjustments are made to high-risk and long-duration cash flow assets.
Signals of QT tapering.
Risk assets could rise, short-term bond yields fall, and mid-to-long-term growth stocks and emerging market currencies could strengthen.

The ‘Real Core’ Most Overlooked by News: Liquidity Pipelines and the Inflexion Point of QT.

The sum of the RRP balance and bank reserves is the ammunition of system liquidity.
When the RRP nears its bottom, it becomes challenging to continue QT at the same pace, prompting the Fed to consider tapering QT in order to defend ‘reserve adequacy’.
Micro signals such as spikes in SOFR and GC repo rates, as well as increased participation in reverse repo operations, are precursors to liquidity stress.
The mix in Treasury issuance (bills versus coupons) in the Treasury’s QRA affects the ‘term premium’ of long-term rates.
If the coupon component increases, there is greater upward pressure on long-term rates, and when combined with QT, bond volatility escalates.
Post the termination of the BTFP, any shifts in banks’ funding structures, a balance between deposit outflows and MMF inflows, could constrain leverage supply.
Discussions on the Fed’s SLR and supplementary SLR may have ripple effects on Treasury absorption capacity and the term premium.
All these factors have more direct implications on exchange rates, credit spreads, and stock multiples rather than just the direction of interest rates.

AI Trend Perspective: How Data Center Power Demand Provides Long-Term Signals to Inflation and Interest Rates.

Expansion in AI servers and data centers drives long-term investments in power and grid infrastructure.
If wholesale electricity prices and rates rise, they can amplify the stickiness of service prices and raise the floor for inflation.
The increased demand for grid investments and components such as transformers, cables, and power semiconductors creates a CAPEX cycle that is structurally separate from the business cycle.
Even if the Fed mentions disinflation resulting from productivity gains, rising costs in power, land, and construction could exert upward pressure on the neutral rate (r*).
From an investment perspective, there is long-term visibility into sectors such as power facilities, HV cables, transformers, power semiconductors, cooling systems, and the AI server supply chain.
During phases of declining interest rates, growth stocks with long-term cash flows tend to benefit, but if power bottlenecks trigger inflation, the pace of re-rating may slow down.

Focus for Korean Investors: Exchange Rates, Bond Duration, Semiconductors, and Power Utilities.

The KRW/USD exchange rate is most sensitive to the tone of the statement and the rate cut path shown in the dot plot.
If the result is dovish, it is likely to be accompanied by a stronger Korean won and net foreign buying.
A strategy for Treasuries is to gradually increase duration, then expand exposure when QT tapering signals are confirmed.
In stocks, core positions should be centered on growth stocks in sectors such as semiconductors and the internet, as well as beneficiaries of power infrastructure, with energy and financials serving as hedges against hawkish risks.
If the dollar weakens, the beta of gold, silver, and copper may increase, so consider adding exposure to commodities.

Checklist: Evaluate in This Order After the Results Are Out.

Compare the risk balance and inflation language in the statement.
Check the changes in r* and the median for 2026–2027 in the dot plot.
Examine the consistency of the core PCE, unemployment, and growth projections in the SEP.
Look for comments on QT, RRP, and reserve levels in Powell’s press conference.
Note the initial 30-minute responses of the U.S. 10-year Treasury yield, the dollar index, and the KRW/USD pair.
In the Korean market, monitor the relative strength and trading volumes of semiconductors, internet stocks, and power infrastructure.

Risk Management: Positioning Before and After Major Events.

Just before the announcement, it is safest to reduce leverage and maintain delta/gamma neutrality.
If the results are dovish, expand exposure to growth stocks, duration, and emerging market currencies; if hawkish, rotate into value, energy, and defensive stocks.
If hawkish remarks on QT are made, maintain a higher proportion of cash and short-term bonds to brace for widening credit spreads.
Predefine your stop-loss and position sizing, and divide your response to the overreactions in event-driven volatility.

Note: Limitations of Real-time Information and Plans for Updates.

This article provides an analytical framework based on the information available just before the meeting, and the actual results will need to be updated immediately after disclosure.
Once the final statement, dot plot, and full press conference transcript are released, update the numbers and wording according to the checklist above.
It is recommended to check the real-time figures and quotes after the official Fed materials are made public.

< Summary >The core of the December FOMC lies in the tone of the statement, the r* and cut trajectory from the dot plot, and the liquidity signals related to QT, RRP, and reserves.
A dovish outcome can lead to rate cuts, a weaker dollar, and stronger growth stocks, whereas a hawkish result might prompt an upward revision of long-term rates and increased favor for value stocks and energy.
AI data center power demand introduces long-term variables that could lift the floor of inflation and exert upward pressure on the neutral rate.
Korean investors should respond with strategies focused on exchange rates, duration management, and sectors like semiconductors and power infrastructure.

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*Source: [ Maeil Business Newspaper ]

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