What to watch from tonight’s Fed meeting
Article published on December 18th, 2024 – 7:21AM UK Time
The upcoming Federal Reserve decision focuses on the future path of interest rates, particularly into 2025, with the Summary of Economic Projections (SEP) being the key highlight. The Fed is widely expected to cut rates while signalling caution regarding future easing due to persistent inflation concerns and heightened policy uncertainty under President-elect Trump’s pro-growth agenda.
Key Scenarios
Surprise Hold
- Description: The Fed unexpectedly holds the Federal Funds Rate steady.
- Market Impact:
- Immediate upside for the USD.
- Heavy selling pressure on EUR/USD at market.
- Likelihood: Low, but cannot be entirely ruled out.
(Check SEP projections to ensure they confirm a bullish outlook)
Base Case: 25bps Rate Cut
- Expected Action:
- Federal Funds Rate cut by 25bps to 4.25%-4.50%.
- Projected Revisions (General Updates to September SEP):
- GDP: Revised up for 2024 to 2.4%.
- Unemployment: Down to 4.2% for 2024.
- Core PCE Inflation: Revised up to 2.8% for 2024, easing to 2.3% in 2025.
- Longer-Run Rate: Remains at 2.9%; 2025 year-end projection moves to 3.6%.
- Market Impact:
- Limited trading opportunities as this outcome aligns with expectations.
Bullish USD Scenario - 25 bps Cut and SEP revisions higher
- Conditions: A 25bps cut AND the following SEP revisions:
- GDP:
- 2024 revised to 2.4%.
- 2025 and 2026 projections at 2% or higher.
- Unemployment:
- 2024 at 4.2% and 4.3% or lower through 2026.
- Core PCE Inflation:
- 2024 at 2.8% or higher.
- 2025 at 2.3% or higher.
- Longer-Run Rate Outlook:
- 3% or higher for 2027 and beyond.
- GDP:
- Market Impact:
- USD Strength.
- Strong selling pressure on EUR/USD at market and gold sellers (though be careful of gold as buyers have been stepping in despite a stronger USD and higher yields over the last few months)
Summary
While a 25bps cut is the base case, attention will centre on the Fed’s projections for growth, unemployment, inflation, and longer-term rates. A more hawkish revision, particularly for GDP, inflation, and longer-run rates, will drive USD strength, whereas a surprise pause would similarly benefit the dollar. Markets will react strongly to deviations from these expectations and watch for Powell’s comments immediately after the decision.