As the Federal Reserve gears up for its final meeting of 2024 next week, analysts are widely anticipating a final interest rate cut to conclude the year. This potential adjustment could significantly influence economic conditions and consumer behavior moving forward.
With numerous economic uncertainties on the horizon, Wall Street is placing its bets on the Fed as a stabilizing force. Analysts and interest-rate observers are projecting a substantial likelihood—around 88%—for a 25-basis point rate cut next week, which would lower the federal funds rate to a range of 4.25% to 4.50%. This would mark a significant shift in monetary policy as the economy adjusts to post-pandemic realities.
“The distortions from the COVID era seem to be dissipating,” commented Elyse Ausenbaugh, the head of investment strategy at J.P. Morgan Wealth Management, in her email commentary. “Thus, a cut in December appears highly probable.” This reflects a broader sentiment that as the economy stabilizes, the Fed may need to take decisive action to support growth.
According to CME FedWatch, a widely used interest-rate probability tracker, there’s an impressive 88% likelihood of a 25-basis point rate cut occurring. Additionally, a similar forecasting tool from the Federal Reserve Bank of Atlanta estimates that such a rate cut has an 80% chance of happening. These predictive models also indicate a 14% and 18% chance, respectively, that interest rates will remain unchanged during this meeting. This highlights the general consensus among economists about the Fed’s likely path.
Following a period of maintaining rates at 0% throughout the pandemic, the Fed has progressively raised rates during 2022 and 2023. Notably, the Fed enacted a 25-point rate cut in November and a more substantial 50-point cut in September. During a press conference after the November cut, Fed Chair Jerome Powell characterized the labor market as robust and expressed optimism about inflation gradually trending down to the Fed’s long-term target of 2%. This suggests a measured approach to future monetary policy.
Minutes from the recent Fed meeting revealed that some officials expressed concerns regarding persistent inflation, which is proving more challenging to control than anticipated. Subsequent inflation reports confirmed this, noting that the headline inflation rate rose slightly to 2.6% in October, indicating that while progress is being made, challenges remain.
Fed officials are scheduled to convene in Washington, D.C., on December 17, with their decision to be announced on December 18. This meeting will likely be critical in shaping the economic landscape as the Fed navigates through a complex array of economic indicators and pressures.
Forecasting Interest Rates for 2025: What to Expect
Looking ahead to 2025, forecasts become significantly more uncertain. Overall, many experts anticipate that inflation will continue to decrease, leading the Fed to carry on with interest rate reductions. However, the return of President-elect Donald Trump to the White House introduces a layer of unpredictability into the economic outlook.
“The following year presents a different scenario,” stated Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management, in her comments to CNBC, “due to the uncertainties surrounding potential tariffs and other policies from the Trump administration.” This comment underscores the potential for significant shifts in economic policy that could impact market conditions.
Zentner elaborated that markets are already factoring in the possibility that the Fed may implement fewer rate cuts in 2025 than initially projected, with a potential halt to rate cuts as early as the January meeting. This could lead to a more cautious approach from investors as they assess the implications of these changes.
J.P. Morgan has revised its forecast to predict four rate cuts in the upcoming year, with one cut expected each quarter. This marks a shift from their earlier prediction of one 25-point cut at each of the eight Fed meetings scheduled for next year. The firm now anticipates that the Fed will cease rate cuts once the target reaches 3.5%, an adjustment from their previous forecast of 3%.
According to Sofia Baig, an economist at the research firm Morning Consult, tariffs—and even the mere threat of tariffs—could escalate inflation and complicate the Fed’s monetary policy strategy in the coming year. This potential for increased inflation poses a challenge for the Fed as it tries to maintain stability in the face of changing economic conditions.
“Supply chains are already displaying signs of reheating,” she noted in her email commentary, “and could face further challenges in 2025 due to possible economic policies like broad-based tariffs.” This prediction highlights the interconnectedness of global trade policies and domestic economic conditions.
On Sunday, Trump provided some clarity regarding a significant concern for the Fed. During an interview on NBC’s Meet the Press, the president-elect indicated he does not plan to ask Powell to resign, thereby alleviating speculation about a potential change in Fed leadership. This announcement could instill a sense of stability within the financial markets.
Powell, who was appointed by Trump, has been at the helm of the Fed since 2018, and his continued leadership may influence the direction of future monetary policy decisions.
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