Despite a lack of progress in curbing inflation in November, market analysts widely anticipate the Federal Reserve will cut its benchmark interest rate by 25 basis points at its December 17-18 meeting. Federal funds futures indicate a near 100% probability of this rate cut, according to analyst Megan Leonhardt. This move is likely motivated by a desire to align the benchmark rate with current economic conditions, including cooling inflation and a normalizing labor market.
However, the future path of interest rates remains uncertain. While the December cut seems almost guaranteed, Federal Reserve Chair Jerome Powell is expected to signal a potential pause in rate cuts early next year. This cautious approach reflects the complex economic landscape the Fed faces.
Several factors contribute to this uncertainty. While inflation has fallen significantly from its 2022 peak, the Fed’s mandate requires continued vigilance in managing price pressures. Furthermore, the evolving fiscal policy landscape and emerging soft spots in the labor market require careful monitoring. These complexities may lead the Fed to avoid aggressive rate cuts in the coming months.
Goldman Sachs predicts a 25 basis point rate cut in December, followed by similar cuts in January and March 2025. They anticipate further reductions only in the June and September meetings. However, this forecast is subject to change. An increasing number of Fed officials have hinted at a potential slowdown in the pace of rate cuts sooner than expected, raising the possibility of a pause as early as the January meeting.
Market traders currently price in a 97% chance of a 25 basis point cut in December. However, strong November economic data has increased the likelihood of a pause in early 2025. Powell’s post-meeting comments and the Fed’s updated economic forecasts will be crucial in providing clarity on the central bank’s future policy direction.
