The Federal Open Market Committee is expected to cut rates by 25 basis points at its meeting this week, with many analysts projecting fewer cuts ahead, which they say will be verified by the Summary of Economic Projections.
“We think the FOMC will deliver a ‘hawkish cut,'” lowering the fed funds range to a range between 4.25% and 4.50%,” said BNP Paribas Chief U.S. Economist James Egelhof. “Chair [Jerome] Powell will likely use the press conference to open up optionality for a pause in further easing of undefined length.”
The Fed “will probably open the door for a pause in further cuts of undefined length, emphasizing that policy easing will proceed ‘cautiously’ and that they are not in a ‘hurry,'” he said.
Powell will once again have to skirt questions about policy expectations for the new Trump administration, but Egelhof said, “his actions should line up with management of elevated inflation risk.”
James Ragan, director of wealth management research at D.A. Davidson, agrees the likelihood is a 25 basis point cut. “We see virtually no chance of a larger cut at this meeting, but a small chance of a pause in December,” he said.
A pause would show the Fed’s data-dependence, but Powell’s talk of a “recalibration” of policy “highlights the central bank’s near-term goal to bring the fed funds target to a more neutral level, from a restrictive stance.”
With the labor market cooling and policy still restrictive in the Fed’s view, ING Chief International Economist James Knightley said a cut is expected.
“However, the lack of meaningful progress on inflation means that in their summary of economic projections officials are likely to signal just three rate cuts in 2025 versus the four they projected in September.”
Wells Fargo Securities Chief Economist Jay Bryson and senior economists Sarah House and Michael Pugliese agree with the likelihood of a cut but see the Fed “simultaneously emphasizing that future rate cuts will be slower-going and dependent on incoming data.”
While hinting at a December cut, they said, “officials have also suggested that current policy is now at a place where further reductions could occur more slowly. Thus, we expect that after lowering the target range by 25 bps to 4.50%-4.75% in December, additional easing is likely to occur at an every-other-meeting pace.”
But others don’t see the cut choice as clear.
“The Committee now has a tough decision to make: whether to pause this meeting or to continue its rate cuts,” said Robert Eisenbeis, Cumberland Advisors vice chairman & chief monetary economist.
The labor market is “solid,” and GDP was 2.8% in the third quarter, but with “inflation ticking up from 2.1% in October to 2.3% in November and an even stronger prospect for Q4, the decision becomes harder,” he said.
The Fed must determine “whether the increase in inflation is just a bump in the road or whether inflation is still on the desired path,” Eisenbeis said. “Is growth too strong in terms of demand (which might drive prices up again)?”
BNP’s Egelhof sees slight changes to the SEP for 2025 “to account for momentum from the prior year for growth, while headline and core PCE get revised up based on continued stickiness.”
As for the dots, he sees the longer-run dot being lifted for the fourth consecutive quarter.
D.A. Davidson’s Ragan sees upward revisions to the SEP’s GDP projection. As for inflation, the last estimate of 2024 year end core PCE inflation of 2.6% and 2025 of 2.2% will not be changed much, he said, “as core PCE has trended at 2.8% or 2.7% the past few months and we believe the Fed still sees inflation trends improving next year.”
It’s possible the Fed will reduce its rate cut projections for 2025, as Ragan notes that “3.4% would reflect four 25bp rate cuts, easily achievable even with a pause, as the Fed could cut and pause at every other meeting.”
“There is a higher probability of fewer than four cuts than more than four cuts, in our view,” Ragan added.
Morgan Stanley expects the dot plot to show four cuts next year and one in 2026. “Risks lie in the direction of fewer cuts.”
Powell, Morgan Stanley said, “is likely to sound confident on disinflation while saying the Fed will be more cautious in removing policy restriction.”
Stronger-than-expected data will impact the SEP projections, Wells Fargo’s Bryson, House and Pugliese said. “Projections for 2025 may be more dispersed than usual given that individual participants might assume different economic policy outcomes, such as higher tariffs, lower taxes or slower growth in the foreign-born labor force.”
The dots will show one less cut in 2025, they expect, but two fewer would not be a surprise, “given the recent run of firm data and the possibility of some participants re-centering the risks to their forecasts in light of potential policy changes.” Long-term, they see the projection rising to 3.0%.
David Miller, co-founder and CIO at Catalyst Funds, sees two additional cuts after this week’s decision, “although the rationale appears more about aligning with their forecast than addressing a pressing economic need.”
If controlling inflation was the objective, he said, “they wouldn’t have made a 50-basis point cut earlier.
“The economy is performing well, with unemployment around 4% and GDP growth healthy, so there’s no strong justification to aggressively stimulate when these indicators are near record highs,” Miller said.
“The Fed will probably want to adjust their projections higher for core PCE inflation and lower for unemployment,” said CIBC Managing Director and Head of Fixed Income Gary Pzegeo. “This should justify a 0.25% bump higher in the median rate projection when compared to expectations from the Fed’s September SEP.”
Unemployment and inflation projections will be steady, he said, “until the Fed has a better handle on the new administration’s policies on trade, immigration, regulation, and taxes. Powell’s Fed has gradually been increasing its estimate of the longer-term policy rate and we would expect that to continue in the coming months.”
Still-sticky inflation should slow the Fed’s cutting to every other meeting next year, said Bryce Doty, senior VP and senior PM at Sit Investment Associates. “Rather than obsessing over the neutral fed funds rate, we like to focus on the gap between the fed funds rate and core PCE as a measure of the restrictiveness of Fed policy. Historically, there is no gap so the current fed funds rate of 4.5% compared to roughly 3.0% for core inflation is still restrictive enough to give the Fed room to cut.”
As further cuts narrow the gap, he said, “the Fed will become increasingly reluctant to cut in the future which is why we expect the pace of rate cuts to slow in 2025.”
Increased inflation in 2025 “will limit the Federal Reserve’s ability to continue cutting interest rates deep into 2025,” said Lauren Saidel-Baker, an economist with ITR Economics. “It is even possible that the Fed will begin increasing rates before the end of 2025.”
She doesn’t “expect rates to fall back to recent lows.”
D.A. Davidson’s Ragan said he’s raised his growth outlook since November, and GDP could be above trend in the first half of next year. “This could keep the Fed on hold to start the year.” He said. “Ultimately however, the economy will slow and the Fed will be able to resume its normalization path.”
While the four cuts now expected in 2025 can be achieved, Ragan said, “We see two to three 25bp cuts in 2025, vs. four in early November.”
But, he noted, there are risks to the outlook, including “election fallout, global military escalation, and U.S. deficit/budget concerns.” These may raise volatility, Ragan said, “but not necessarily a sustained market decline.”
It would take “a weak economy or recession” to cause a sustained market decline, he said. “While current data trends do not point to earnings headwinds in the near-term (Q4 into early 2025) we believe that investors have largely priced out this scenario, which makes us nervous.”