The Federal Reserve is widely expected to deliver a 25-basis point interest rate cut this week, but many analysts believe this could be the last cut for a while. A resilient economy and signs of reversing disinflation suggest the need for further immediate easing may be waning. This shift in sentiment has led to speculation about a potential pause in rate cuts at upcoming meetings, with some even predicting a resumption of rate hikes as early as 2025.
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Economic Strength and Inflation Reversal Signal Potential Pause
The final Federal Open Market Committee (FOMC) meeting of 2024 is scheduled for Tuesday, and while a 25-basis point rate cut is almost certain, the outlook for subsequent meetings is less clear. According to Yardeni Research, Fed Chair Jerome Powell may use his post-meeting press conference to signal a pause in further rate cuts.
A key factor contributing to this potential pause is the continued strength of the US economy. The Atlanta Federal Reserve’s GDPNow model projects annualized growth of 3.3% in the fourth quarter. Coupled with recent indications that disinflation may be reversing, this suggests further rate cuts could be counterproductive. Yardeni Research highlights the risk of overheating the economy with continued easing, given the robust growth and potential for inflation to rebound.
Goldman Sachs and Futures Markets Align with Pause Expectations
Goldman Sachs’ chief economist, Jan Hatzius, echoes this sentiment, anticipating a slowdown in the pace of rate cuts. He has removed a January rate cut from his forecast and now expects only two 25-basis-point cuts in 2025. Futures markets reflect this view, with the CME FedWatch Tool indicating a mere 15% probability of a January rate cut.
Apollo Chief Economist Raises Prospect of 2025 Rate Hikes
While a pause in rate cuts appears to be the consensus view, Apollo’s chief economist, Torsten Sløk, posits a more aggressive scenario. He suggests that the recent stall in disinflation, combined with strong economic momentum, could lead to a rebound in inflation in 2025. This, he argues, might necessitate a reversal in the Fed’s policy stance, with potential rate hikes in 2025.
However, the probability of rate hikes in 2025 remains low, with the CME FedWatch Tool assigning a mere 0.1% chance to this outcome. Nevertheless, Sløk’s perspective highlights the uncertainty surrounding the future path of interest rates and the potential for unexpected developments to influence Fed policy.
Conclusion: Uncertainty Looms Over Future Interest Rate Decisions
While a December rate cut seems inevitable, the future trajectory of interest rates remains uncertain. The Fed’s decision will hinge on the evolving economic landscape and the path of inflation. While a pause in rate cuts appears likely in the near term, the possibility of renewed rate hikes in 2025, though remote, cannot be entirely dismissed. Investors should closely monitor economic data and Fed pronouncements for clues about the future direction of monetary policy.
