- Francis Généreux
Principal Economist
Essentials of Monetary Policy
The Fed Sees Fewer Rate Cuts Ahead
December 18, 2024
According to the Federal Reserve (Fed)
- The Committee decided to lower the target range for the federal funds rate by 1/4 percentage point to 4.25% to 4.50%.
- Recent indicators suggest that economic activity has continued to expand at a solid pace. Since earlier in the year, labor market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made progress toward the Committee's 2 percent objective but remains somewhat elevated.
- The Committee judges that the risks to achieving its employment and inflation goals are roughly in balance.
- In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.
Comments
The headline coming out of today’s Fed meeting won’t be the decision to cut interest rates another 25 basis points. Markets had already priced it in, and the vast majority of forecasters surveyed by Bloomberg (103 out of 111) called it correctly. It appears there was some debate among committee members, however, and the decision wasn’t unanimous. The dissenting vote came from new Cleveland Fed President Beth Hammack, who would have preferred to hold rates steady.
Instead, the bigger surprise was the Fed's Summary of Economic Projections (SEP). It showed far fewer interest rate cuts in 2025 than the previous version did. Back in September, the Fed was forecasting four 25-basis-point reductions in 2025, bringing the top of the target range down to 3.50% by the end of next year. Now, the Fed sees just 2 cuts, with the top of the target range at 4.00%. It’s predicting two additional moves lower in 2026 and one more in 2027.
The Fed’s GDP and unemployment projections for the next few years were largely unchanged. But there were some adjustments to the inflation forecast. The Fed now sees stronger price growth for the rest of 2024 and raised its forecast by 0.4 percentage points for 2025 and 0.1 point for 2026. This is likely why it doesn’t see the need for as many rate cuts next year as it did in September.
The Fed also lifted its long-term interest rate forecast again. It seems to think that ongoing economic strength and sticky inflation despite higher interest rates since March 2022 mean interest rates need to be higher for longer to contain inflation and keep it close to target. It has upgraded its neutral rate forecast in every SEP this year, raising it from 2.5% late last year to 3.0% today.
At the press conference, Jerome Powell emphasized the uncertainty surrounding the projections and the future path of inflation and interest rates. This partly explains the Fed's cautious stance and its expectation for fewer interest rate cuts. And some of that uncertainty can be attributed to tariff risks.
Implications
As expected, the Fed announced a second 25-basis-point cut today, but it also revised its forecast for future rate reductions. If inflation continues to be sticky, the Fed may not need as many rate cuts as it projected in September. Meanwhile our forecasts suggest that two cuts next year would be the minimum scenario rather than the most likely outcome.
2024 Schedule of Central Bank Meetings
