FOMC meeting, December 17–18

Meeting preview

A blind cut

• The Federal Reserve is likely to cut the federal funds rate by 25 basis points (bps) to 4.25-4.50% at next week’s Federal Open Market Committee (FOMC) meeting. However, the vote may not be unanimous given diverging perspectives around the degree of restrictiveness of monetary policy and how much more recalibration is needed to return policy to a neutral stance.

• Those policymakers focused on backward-looking data will likely favor a pause in the easing cycle based on stronger economic data and the perception of stickier inflation, but we believe Fed Chair Jerome Powell will promote a forward-looking risk management approach. He will likely argue that the FOMC should ease policy in December and move “more gradually” toward a neutral policy stance in 2025. 

• This will serve to reassure the policymakers who have been favoring a conditional pause in the easing cycle should inflation remain elevated. Indeed, while almost all policymakers view the risks to achieving the Committee’s employment and inflation goals as roughly in balance, some have recently stressed that they see downside risks to economic activity or the labor market as having diminished.

• The policy statement is likely to be modestly altered with the economic assessment reflecting labor market resilience and slower inflation progress toward 2%. While the statement will continue to indicate that risks to achieving the employment and inflation goals are roughly in balance, the FOMC may decide to alter the forward guidance in the statement: 
  • “In assessing the appropriate stance of monetary policy, the Committee will continue to [carefully] monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy [more gradually] as appropriate if risks emerge that could impede the attainment of the Committee's goals.”

• We anticipate the dot plot of median rate expectations will drift higher and feature three 25bps rate cuts to 3.6% in 2025, up from 3.4% and four rate cuts in the September dot plot. We foresee the dot plot showing 50bps of easing to 3.1% in 2026 and another rate cut to 2.9% in 2027. We don’t discount the possibility that policymakers will raise their long-term estimate of the neutral rate a tick to 3.0%.

• The Summary of Economic Projections (SEP) will likely reflect higher median GDP growth expectations at 2.4% year over year (y/y) in Q4 2024 (versus 2.0% in September), and unchanged growth projections around 2.0% in 2025. The unemployment rate trajectory is likely to be revised lower by 0.2ppt to 4.2% in Q4 2024 but remain unchanged at 4.4% in Q4 2025. Meanwhile, core personal consumption expenditures (PCE) inflation will likely be revised higher by 0.2ppt to 2.8% y/y in Q4 2024 but remain at 2.2% y/y in Q4 2025.

• During the press conference, Powell will face the delicate exercise of having to reconcile a 25bps rate cut with stronger economic and inflation projections and a more gradual policy easing trajectory. Since he will likely repeat that policymakers don’t guess, don’t speculate and don’t assume specific policy developments, the inflationary consequences of deregulation, immigration restrictions, tariffs and tax cuts in 2025-26 won’t serve as a justification.  

• Instead, we look for Powell to reiterate the familiar metaphor of moving slowly in a dark room full of objects to justify a potential rate cut “skip” at the January meeting. He will likely note that the Fed is in no rush to reach a neutral policy stance and that we will only know where neutral policy is once we’re there. As such, this will favor a gradual easing of policy to observe how the economy and inflation behave – indicating an extremely data-dependent approach.

• We believe the Fed will decide to slow the recalibration process in 2025 as policymakers feel their way to a neutral policy stance and navigate upside risks to inflation. We see a rate cut at every other meeting through Q3 2025, for a total of 75bps of easing (down from 100bps previously).