The Federal Reserve announced a policy decision to cut interest rates by 0.25% on December 18. This decision was accompanied by Federal Open Market Committee member forecasts, which reflected expectations of fewer and slower additional Fed interest rate cuts through the end of 2025, 2026, and 2027 than the FOMC forecasted in September 2024.
Federal Reserve Cuts Interest Rates By 0.25%
The Federal Open Market Committee cut the federal funds rate today by 0.25%, targeting a range between 4.25% and 4.50%. An interest rate cut was largely expected across markets, as seen in the CME FedWatch Tool. However, market expectations were divided on what to expect from FOMC projections of future interest rates and economic conditions.
The Fed has a dual mandate to foster full employment and keep prices low and stable. Given the relatively solid labor market but elevated consumer inflation, the Fed has the license to cut rates slowly.
Federal Reserve Forecasts Reflect Future Rate Cuts
Investors, economists, and business leaders anticipated a 0.25% interest rate cut on December 18. They were also eagerly awaiting the quarterly FOMC forecasts, especially members’ median forecasts of future interest rates.
Along with the December 18 Fed policy statement, FOMC forecasts were released in a table with interest rates, GDP growth, PCE inflation, and the unemployment rate. The forecasted interest rates also appeared in a graphic depiction that economists and investors refer to as the dot plot, which shows anonymized individual FOMC member forecasts of future interest rates.
The dot plot of median FOMC member forecasts conveyed that Fed members expect to enact additional rate cuts in 2025, 2026, and 2027. However, these projections reflected expectations of fewer and slower interest rate cuts than in the previous FOMC projections that were released on Sept. 18, 2024.
Compared to September figures, the updated December FOMC median forecasts of interest rates were raised to 3.9% for the end of 2025 (up from 3.4%), 3.4% for the end of 2026 (up from 2.9%), and 3.1% for the end of 2027 (up from 2.9%).
Fed Projections Of GDP, Inflation, And Unemployment
Fed member forecasts of real GDP growth remained relatively positive, although inflation is expected to remain above the Fed’s 2% target until Q4 2027. Unemployment is expected to be slightly better than previously forecasted.
The FOMC forecast for the median Q4 2025 unemployment rate was lowered to 4.3% from 4.4%. Meanwhile, the median year-on-year real GDP forecast for Q4 2025 was raised slightly to 2.1% from 2.0%.
On the downside, the median Q4 2025 year-on-year PCE and Core PCE inflation expectations were raised to 2.5%. In the September 2024 projections, Q4 2025 PCE was forecasted to be 2.1%, and Core PCE was forecasted to be 2.2%.
Market Implications Of Fed Policy And FOMC Projections
With fewer interest rate cuts in the December 2024 FOMC projections than in the September 2024 projections, financial markets are likely to move on the back of this Fed decision. The dollar and bond yields are likely to rise following this support, while bond prices, equity prices, and industrial commodity prices are likely to come under pressure.
As always, this isn’t the end of the Fed’s story today. A great deal of attention will be paid to ongoing economic data and Fedspeak, including Fed Chair Jerome Powell’s remarks in his December 18 press conference after the policy decision announcement.
What do you think of the December Fed policy decision and FOMC projections?
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