Fed Rate Decision: 25 Basis Point Cut Priced in; What Next?

Fed Rate Decision: 25 Basis Point Cut Priced in; What Next?

Today’s rate announcement is scheduled for 7 pm GMT, accompanied by the usual rate statement and press conference, as well as the quarterly Summary of Economic Projections (‘SEP’). The SEP includes projections for inflation, economic growth, unemployment and the funds rate over the next few years. 

25 Basis Point Cut on the Table

Markets and economists expect the US Federal Reserve (Fed) to conclude the year by implementing another 25 basis point (bp) rate cut. This would mark the third consecutive reduction, bringing the benchmark target rate to 4.25-4.50%. However, not everyone agrees that a rate cut is the right move. Analysts at Monex believe that cutting rates at this time would be a ‘mistake’; they noted that the Fed is unlikely to ignore market expectations (they seldom do), which currently indicate a 97% chance of a rate reduction.

So, with a rate cut largely baked in, I believe most of the market will focus on the Fed’s expectations for 2025, which are less clear-cut. Language in the rate statement and Fed Chair Powell’s press conference will be scrutinised for clues pointing to a slower pace of rate cuts. The updated quarterly projections will also be in the spotlight, particularly the Fed’s outlook on the terminal rate. However, markets expect the central bank to be more cautious as we enter 2025, suggesting that the Fed may take its foot off the pedal at January’s meeting and keep rates unchanged.  

Overall, I anticipate a slight upward revision to both inflation and GDP forecasts. It’s also possible that the Fed’s dot plot will indicate a slower pace of rate cuts compared to previous projections, which had expected four 25 bp reductions in 2025. My outlook is primarily driven by persistent US inflation, cautious comments from key Fed officials, and the potential inflationary effects of proposed policies from President-elect Donald Trump.

Federal Reserve Bank of Cleveland President Beth Hammack indicated that the economy is ‘at or near’ the point where the Fed should consider slowing down policy easing. She stated, ‘Taking a gradual approach will help us adjust our policy to the right restrictive level over time, considering the underlying strength of the economy’. Hammack also mentioned that inflation, growth, and the labour market are performing better than the Fed initially anticipated.

US Economy: ‘Firm Footing’

The US economic outlook currently appears stable, and I believe the recent data is not strong enough to warrant a rate cut today. The latest job figures indicate that non-farm payrolls increased by 227,000 jobs in November, a significant rebound from just 12,000 new positions in October. This recovery was due to the resolution of strikes and the impact of weather. However, the unemployment rate rose to 4.2% in November, up from 4.1% in October. Additionally, job openings continue to trend downward, and hiring rates remain low, suggesting underlying weakness in the labour market.

While US inflation is trending southbound, the year-on-year (YY) CPI inflation rate (Consumer Price Index) rose for a second consecutive month to 2.7% in November, up from the 2.6% pace in October and the 2.4% low in September. Excluding food and energy components, YY core US inflation rose 3.3% for the third consecutive month in November. 

Real US GDP data (Gross Domestic Product) grew at an annualised rate of 2.8% for Q3 24, according to the second estimate released by the Bureau of Economic Analysis. The final GDP growth estimate (Q3 24) is due tomorrow but is expected to remain unchanged. Consumer spending is robust in the US, with the latest retail sales print rising higher than expected in November at 0.7%, from an upwardly revised reading of 0.5% in October. 

As far as I see, the Fed is still on course to engineer a soft landing – steering inflation towards its 2.0% inflation target without causing a recession.

What Will I Be Watching?

Should the Fed opt for dovish language and the dot plot project rate reductions next year (keeping four rate cut projections), I will closely watch for a push lower in the US dollar (USD) and US Treasury yields, as well as a bid US equity markets and spot gold (XAU/USD). In addition, I would also want to see the Fed projecting a stable view of growth, noting that progress on inflation should accelerate next year and highlighting a cooling jobs market. 

On the other hand, should the Fed’s language adopt a hawkish tone and the dot plot signals 2-3 cuts over the next year, I expect a rally in the USD and US Treasury yields and a dip lower in major US equity indexes and spot gold. Further to this, I would also want to see the Fed point to robust economic performance and the possibility of stickier inflation and highlight strength in the labour market.

As a note, long-term technicals exhibit scope for further outperformance in the US Dollar Index on the monthly chart until 109.33, with the S&P 500 recently testing all-time highs of 6,099. For spot gold, current action on the daily chart offers limited movement, largely consolidating between US$2,721 and US$2,630 since late November.

Written by FP Markets Market Analyst Aaron Hill