Zinger Key Points
- The Fed is expected to cut rates by 0.25%, bringing them to 4.25%-4.50%, its third consecutive cut in 2024.
- Markets focus on the updated dot plot and inflation forecasts, which could reshape 2025 interest rate expectations.
Policymakers are expected to lower the federal funds rate by 0.25%, bringing it to a target range of 4.25%-4.50%.
While the move has been widely anticipated, traders are less concerned about the cut itself and more focused on the Fed’s forward-looking guidance — particularly the updated Summary of Economic Projections (SEP) and the closely watched “dot plot.”
Here’s what you need to know.
December’s Dot Plot, Inflation Forecasts Likely To Show Hawkish Revisions
In September, the Fed’s dot plot – a chart that shows where each policymaker thinks interest rates should be in the future – projected the federal funds rate would finish 2024 at a median level of 4.4%.
The expected 0.25% cut at this meeting aligns with that projection, leaving little surprise on the surface.
Yet, the December SEP will offer a glimpse into the Fed’s plans for 2025 and beyond, potentially reshaping market expectations.
Back in September, the Fed forecasted 100 basis points of rate cuts in 2025, signaling four 0.25% reductions over the year. But with recent data showing hotter-than-expected inflation and stronger economic growth, policymakers are expected to scale back these projections.
Analysts are split on a downward revision of 25 to 50 basis points, implying only two or three rate cuts in 2025. This adjustment would reflects a more cautious approach by the Fed.
Fed futures – which reflects market-based interest rate expectations – currently assign a 74% chance on two rate cuts by December 2025, and 26% odds indicating three or more cuts, as per CME FedWatch.
Fed’s Summary of Economic Projections – September 2024
| Variable | 2024 | 2025 | 2026 | 2027 | Longer Run |
|---|---|---|---|---|---|
| Change in real GDP | 2.0 | 2.0 | 2.0 | 2.0 | 1.8 |
| Unemployment rate | 4.4 | 4.4 | 4.3 | 4.2 | |
| PCE inflation | 2.3 | 2.1 | 2.0 | 2.0 | 2.0 |
| Core PCE inflation | 2.6 | 2.1 | 2.0 | 2.0 | |
| Federal funds rate | 4.4 | 3.4 | 2.9 | 2.9 | 2.9 |
Inflation Forecasts: The Fed’s Roadmap To 2% At Stake
Inflation remains the Fed’s top concern.
In September, the Fed projected that the PCE price index would decline from 2.3% in 2024 to 2.1% in 2025, eventually hitting the 2% target in 2026. Core PCE inflation — its preferred inflation gauge — was expected to fall from 2.6% in 2024 to 2.1% in 2025.
If the updated projections indicate a slower return to the 2% target, it could signal a prolonged pause in rate cuts, underscoring the Fed’s struggle to balance its inflation mandate with economic growth.
Markets will be on high alert for any language from Fed Chair Jerome Powell that hints at inflation’s persistence.
Market Dynamics And Powell’s Tightrope
Fed meetings this year have delivered positive reactions by stocks.
Buying the S&P 500 index at market close the day before a Fed meeting and selling the day after has yielded a median gain of 1.1% over the last seven meetings. Extending the holding period to 15 days boosts the average profit to 3.29%, more than double the one-day return.
Yet, Powell has a delicate task ahead.
At his last public appearance on Dec. 4, Powell acknowledged the Fed’s improved growth outlook but cautioned that inflation has proven more persistent than expected.
“We can afford to be a little more cautious as we try to find neutral,” he said, striking a tone that hints at flexibility but leaves markets guessing.
The press conference following the December meeting will be pivotal. Powell must thread the needle between reassuring investors about disinflation progress and addressing inflation’s recent uptick.
A hawkish tone — emphasizing inflation risks — could jolt markets with renewed volatility, while a dovish stance might fuel optimism and risk-taking.
Bottom line, the last Fed meeting of the year isn’t just about the interest rate cut, as the real action lies in the updated Summary of Economic Projections and Powell’s remarks.
Investors will be dissecting every word for clues about the Fed’s strategy heading into 2025.
If Powell strikes the right balance, markets could rally into the new year. If not, expect a rollercoaster ride as traders recalibrate their expectations for the Fed’s next moves.
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Originally Posted December 18, 2024 – All Eyes On December Fed Meeting As Traders Await Interest Rate Projections
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