The Federal Open Market Committee is most likely to cut interest rates again to 4.25% to 4.5% on December 18 according to fixed income markets and the tone of two recent speeches from Federal Reserve governors. Prediction site Kalshi, currently gives a similar 73% chance of a cut. There is more economic data on jobs and inflation to come before the FOMC meets, but with subdued inflation and a somewhat softening jobs market, a cut appears likely.
Recent Fed Statements
The FOMC did cut interest rates at its two previous meetings in September and November after holding rates at peak levels for over a year. Generally, policymakers have signaled that interest rates are likely to move lower over the next year, but the pace of interest rate cuts will depend on incoming data.
Concern that inflation appears potentially stuck above the FOMC’s 2% annual target could delay looser monetary policy, though policymakers appear to be more inclined to look at the broader trend of disinflation rather than worry about single datapoints.
Fed Governor Christopher Waller said, “Recent data have raised the possibility that progress on inflation may be stalling at a level meaningfully above 2 percent. This risk has raised concerns that the FOMC should consider holding the policy rate constant at our upcoming meeting to collect more information about the future path of inflation and the economy. Based on the economic data in hand today and forecasts that show that inflation will continue on its downward path to 2 percent over the medium term, at present I lean toward supporting a cut to the policy rate at our December meeting. But that decision will depend on whether data that we will receive before then surprises to the upside and alters my forecast for the path of inflation.” This was part of a speech given on December 2 in Washington D.C.
Fed Governor Andrea Kugler recently shared a similar view on December 3, “Given how the economy has developed this year, most notably the continuation of disinflation and a modest cooling in the labor market, I see the Fed’s dual-mandate goals of maximum employment and price stability as being roughly in balance. In light of the progress toward our goals, my colleagues and I on the FOMC judged it appropriate to lower our policy rate in September and again last month. These actions were steps toward removing restraint, as we are in the process of moving policy toward a more neutral setting.
Looking ahead, it is important to emphasize that policy is not on a preset course. I will make decisions meeting by meeting and carefully assess incoming data, the evolving outlook, and the balance of risks.”
Likely December Interest Rate Decision
The FOMC raised interest rates, not because inflation was stuck a little over 2%, but because it touched 9% in summer 2022. Therefore, officials have indicated that some of that restrictive policy, in terms of higher interest rates, from recent years should be removed because inflation has now cooled significantly. That’s why a further cut in December appears likely and why further interest rate cuts are anticipated.
However, questions remain for 2025 concerning the trajectory of rate cuts. This will be informed not just by how sticky residual inflation is, but also how the job market performs. Furthermore, the potential for worrying economic data before the FOMC meets in terms of unexpectedly high inflation could delay a cut, whereas any reports on an abruptly weakening jobs market could result in a larger cut. Still, for now these risks appear relatively low and a single cut in December appears most likely.