The Federal Reserve concluded its final meeting of 2024 by lowering interest rates by 25 basis points, setting the target range at 4.25%-4.5%. This move, while anticipated, was accompanied by signals indicating a moderation in the pace of future cuts. The central bank’s updated Summary of Economic Projections (SEP), including the insightful “dot plot,” provides a glimpse into policymakers’ expectations for the trajectory of interest rates.
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Fed’s Forward Guidance Suggests Fewer Cuts in 2025
The latest “dot plot” reveals that Fed officials anticipate the federal funds rate to reach 3.9% in 2025. This projection is notably higher than the 3.4% forecast in September, implying two additional rate cuts in 2025, following the established pattern of 25 basis point adjustments. This contrasts with the four cuts projected in September, suggesting a more cautious approach. Market expectations, prior to the announcement, had priced in two to three cuts next year, according to Bloomberg data. This adjustment comes after a significant 100 basis point reduction in interest rates throughout 2024.
For 2026, officials foresee two more cuts, bringing the fed funds rate to 3.4%. This is again higher than the September projection of 2.9%. The majority of officials (18 out of 19) predict at least one rate cut in 2025, with only one anticipating no change. Notably, no officials foresee rate hikes in the coming year. This convergence in expectations points to a more unified outlook compared to the wider dispersion observed in September.
Navigating a Soft Landing: Balancing Inflation and Employment
The Federal Reserve remains committed to its dual mandate: maintaining price stability and maximizing employment. The ultimate goal is to engineer a “soft landing” for the US economy, characterized by stable price increases and robust employment. While inflation has moderated in 2024, it persists above the Fed’s 2% annual target. Recent monthly “core” inflation readings have exceeded expectations, contributing to this challenge.
The SEP projects core inflation to reach 2.5% in 2025, exceeding the previous 2.2% forecast. However, it is expected to gradually decline to 2.2% in 2026 and reach the 2% target in 2027. This upward revision in the inflation outlook contributed to market reactions following the announcement.
Trump’s Election Adds Complexity to the Economic Outlook
The recent election of Donald Trump introduces further complexities to the economic landscape. Some economists suggest that his proposed policies, including tariffs on imported goods, corporate tax cuts, and immigration restrictions, could trigger a resurgence in inflation. These potential inflationary pressures could complicate the Federal Reserve’s decision-making process regarding interest rates.
Labor Market Dynamics and Economic Growth Projections
The recent uptick in the unemployment rate to 4.2% in November has drawn the Fed’s attention. The current labor market is described as “low-hire, low-fire,” prompting discussions within the Federal Open Market Committee (FOMC) about the pace of cooling in the jobs market. The Fed projects a slight increase in unemployment to 4.3% in 2025, remaining at that level through 2027. This is lower than the previous forecast of 4.4%. Economic growth projections have been revised upwards, with expectations of 2.1% growth in 2025, followed by 2.0% in 2026 and 1.9% in 2027. This reflects an upward revision from the previous forecast of 2.0% growth for those years.
In conclusion, the Federal Reserve’s decision to slow the pace of rate cuts reflects a more cautious approach in navigating the evolving economic landscape. The central bank is carefully balancing its dual mandate amid persistent inflationary pressures and a complex labor market outlook, all while considering the potential impact of the new presidential administration’s policies. The coming years will be crucial in observing how these factors interplay and shape the trajectory of the US economy.
