Fed to Cut Rates, But the Pace of Easing Comes Under Scrutiny
Article published on December 16th, 2024 – 9:49AM UK Time
The Federal Reserve is widely expected to cut its Federal Funds Rate by 25bps to a target range of 4.25-4.50% at its December 18th meeting. While this marks another step toward easing policy, the Fed is expected to signal a more cautious approach to further rate cuts, with the “pace” of reductions likely to dominate discussions heading into 2025.
Balancing Rate Cuts with Inflation Concerns
Recent economic data, including November’s jobs report and benign inflation figures, has strengthened the case for a December cut. However, lingering inflation risks—particularly from President-elect Trump’s proposed tariffs and tax cuts—could slow the Fed’s easing cycle. Analysts suggest the Fed’s preferred core PCE inflation measure for Q4 is likely to be revised up to 2.8% (from 2.6%), reinforcing the need for a more measured path.
Chair Jerome Powell has emphasized the importance of incoming data and noted that rising bond yields have not yet impacted policy significantly. Powell is expected to reiterate that wage gains are not driving inflation and that inflation remains on a sustainable path toward the Fed’s 2% target.
A Rate Pause in January?
Markets currently price a 94% chance of a December rate cut but only around a 20% probability of another reduction in January. The Fed may pause early next year to assess the economic impact of its decisions and the uncertainty surrounding Trump’s economic policies, such as tariffs and immigration controls, which could fuel inflation and complicate rate decisions.
Looking Ahead: Cautious Signals for 2025
While markets previously expected four rate cuts in 2025, the Fed is now likely to signal three 25bps cuts, pushing the terminal rate to around 3.75% by Q3 2025. Stronger near-term growth, driven by Trump’s pro-business policies, may force the Fed to take a more conservative stance to counter inflation risks.
Economic Projections and the Dollar
The Fed’s updated Summary of Economic Projections will be closely watched, particularly for growth and inflation forecasts. Traders will also focus on the Fed’s “long-run” rate projection, currently at 2.9%, for signals about the pace of rate adjustments.
Despite expectations for gradual cuts, the dollar remains resilient, driven by wide rate differentials. The FX market will remain cautious ahead of Trump’s inauguration in January, as his tariff policies could bolster the dollar further.
Conclusion
While a December 25bps rate cut appears certain, the pace of subsequent cuts remains uncertain. The Fed is likely to signal a pause in January to evaluate inflation risks and Trump’s economic plans, with a slower easing cycle expected through 2025. All eyes will be on Powell’s messaging as markets assess how aggressively the Fed plans to move rates closer to neutral.