Below are various influences driving expectations as the Federal Reserve readies its critical interest rate decision on Wednesday, December 18, 2024. The benchmark rate might be changed this week as the central bank balances its efforts between containing inflation and fostering economic growth, hence its significant role in determining America’s economic policy. Here follows what markets and analysts had to say and how this might play out for the overall economy.
The Context of Fed’s Recent Moves
Following the surge in inflation, reaching a height during the post-pandemic recovery of the economy, the Federal Reserve embarked on aggressive increases in the interest rates from March 2022 to August 2023; the federal funds rate has risen to 5.33%, a two-decade high. The Fed had embarked on a significant drive to contain the inflation that hit 8.0% last year. The aim was actually to temper the economy just enough to squash the current pressure without causing a major recession.
However, it has been on an upward trend lately, and for November 2024, the Consumer Price Index reflected a much more reasonable annualized inflation rate of 2.7%, closer to the Fed’s target of 2%. With such a retreat from inflation, the central bank has gone cagey recently. The Fed lowered rates by 50 basis points in September 2024 and a further 25 in November 2024, after it grew convinced that high jolts of hikes were not needed anymore.
A Likely Rate Cut
Wall Street analysts and economists widely expect a rate cut during the Fed’s next meeting. According to predictions, the Federal Reserve will lower its key borrowing rate by 25 basis points to a range of 4.25% to 4.5%, marking the third rate reduction since the Fed started to ease monetary policy in September.
The market is almost wholly pricing in the rate cut, with the CME Group’s FedWatch Tool, which tracks what futures markets are pricing in, showing a 98% probability of such an outcome. Wall Street giants like Morgan Stanley, Goldman Sachs, and Citigroup all forecast the same adjustment. This rate cut most likely reflects the Fed’s desire to stimulate the economy further while avoiding the risks of a recession.
Mixed Predictions on the Future of Rate Cuts
However, there is likely a rate cut coming in December for New Zealand and while expectations for future cuts next year are vague at best, it is not possible to be sure about more cuts in 2025. Some of the analysts are wary over several factors, including Wells Fargo and Deutsche Bank, which have dialed down on further rate cuts. Inflation is still above its 2% target and, while the economy has slowed somewhat, it has not contracted sufficiently to call for deep rate cuts.
Meanwhile, economists at Wells Fargo said that it expects only three additional 25-basis-point cuts in 2025, while Deutsche Bank sees the Fed holding off for at least another year on further rate reductions. Still, analysts at Moody’s Analytics estimate two more cuts within the coming year from the Fed. It simply shows the uncertainty existing about the future monetary policies to be conducted by FOMC.
Key Economic Factors at Play
Key Economic Factors Driving the Markets Forward Several aspects will affect the Fed one way or another in subsequent months. Inflation cooled, yet the economy also grew robustly, still at an annualized growth rate of 2.8%, according to recent reports from Gross Domestic Product. It is added that unemployment presently stands at 4.2%, which indicates, that despite indications of cooling down, the job market is still resilient.
Yet some challenges are still lying ahead. The recent rise in government spending, along with the approaching changes in the presidency and probable increases in tariffs by the new administration, may add uncertainties to the outlook. These might lead the Fed to reassess the rate-cutting path that it has been on, given how these factors play out for inflation and economic growth in the months ahead.
Fed Chairman Jerome Powell’s Post-Meeting Comments
Of course, all eyes will be on the Federal Reserve for more than just a rate cut; additional clarity could be provided by Fed Chair Jerome Powell at a post-meeting news conference. Investors are keenly interested in hearing from both Powell and other Fed officials about their thoughts on current conditions and what monetary policy may resemble ahead of time, considering current inflation pressures and a change in political dynamics.
Conclusion
Wednesday’s move by the Federal Reserve is likely to be a modest 25 basis-point rate cut. The direction for future cuts is less and less certain. It has been an extraordinarily careful balance between inflation and economic growth, and the markets will focus on the Fed’s upcoming projections for 2025 and broader economic conditions. It follows that the investors, businessmen, and consumers would all be ready to notice the slightest shift in the Fed’s approach as a preparation for an economic year ahead.
