FOMC meeting, December 17–18

Meeting recap

Close Fed call leads to recalibration hibernation

• The Federal Reserve cut the federal funds rate by 25 basis points (bps) to 4.25-4.50% at its December Federal Open Market Committee (FOMC) meeting, but Fed Chair Jerome Powell noted it was a “closer call” than the two prior rate cuts. Cleveland Fed President Beth Hammack dissented in favor of a hold, channeling three other non-voting policymakers’ desire to keep policy unchanged given the uncertainty around the degree of restrictiveness of monetary policy.

• The policy statement reaffirmed that risks to achieving the employment and inflation goals are roughly in balance, but it signaled a new phase in the recalibration cycle, noting that the “extent and timing” of additional adjustments to the federal funds rate would depend on incoming data, the evolving outlook and the balance of risks. Powell explained that the “extent” reflected the proximity to the neutral rate and that “timing” reflected the evolution of economic conditions.
  
  
• This will serve to reassure policymakers that have been favoring a conditional pause in the easing cycle should inflation remain elevated. Indeed, while almost all policymakers view the risks to achieving the Committee’s employment and inflation goals as roughly in balance, some have recently stressed that they see diminished downside risks to economic activity and the labor market.
  
  
• The dot plot of median rate interest rate expectations was significantly more hawkish. The FOMC now anticipates only two 25bps rate cuts to 3.9% in 2025, instead of four rate cuts in the September dot plot. The dot plot indicates 50bps of easing to 3.4% in 2026 and another 25bps rate cut to 3.1% in 2027. The estimate of the long-term neutral rate was again revised higher from 2.9% to 3% as Fed officials increasingly acknowledge that rates will likely stabilize higher than pre-pandemic. 
  
  
• The Summary of Economic Projections (SEP) reflects higher median GDP growth expectations at 2.5% year over year (y/y) in Q4 2024 (versus 2.0% in September), and slightly higher growth projections at 2.1% in Q4 2025 (versus 2.0% in September). The unemployment rate was revised lower by 0.2 percentage points (ppt) to 4.2% in Q4 in 2024 and 4.3% in Q4 2025. Meanwhile, inflation projections were revised higher with core personal consumption expenditures (PCE) inflation revised 0.2ppt higher to 2.8% y/y in Q4 2024 and 0.3ppt higher in 2025 to 2.5% y/y in Q4 2025. 
  
  
• Contrary to Powell’s earlier statements that the Fed “doesn’t guess, doesn’t speculate and doesn’t assume” specific policy developments, the stronger inflation projections in 2025 without a commensurate shift in the GDP and unemployment projections suggest that some policymakers did account for potential shifts in regulation, immigration, trade and tax policy. Indeed, Powell implicitly confirmed that the latest projections may reflect inconsistent policy assumptions saying “some people incorporated highly conditional estimates of the economic effects of policies. Some people said they didn't do so. And some people didn't say whether they did or not.”
  
  
• During the press conference, Fed Chair Powell appeared to grapple with reconciling past, current and future policy decisions. His tone varied considerably: dovish when attributing the December rate cut to softening labor market conditions, balanced when discussing potential 2025 cuts by emphasizing anticipated progress on inflation and sustained labor market resilience, and hawkish when citing stronger growth projections, diminished labor market risks and elevated inflation as reasons for reduced policy easing next year.
  
  
• He reiterated the familiar metaphor of moving slowly in a dark room full of objects to justify more cautious policy recalibration next year saying that policy is significantly closer to neutral but still meaningfully restrictive. 
  
  
• Looking ahead, we reaffirm our expectation that policymakers will want to slow the recalibration process in 2025 as they feel their way to a neutral policy stance and navigate upside risks to inflation. Earlier this month, we revised our forecast to show a rate cut at every other meeting through Q3 2025, for a total of 75bps of easing (down from 100bps previously). This would translate into a January skip and a March cut.
  
  
• While economic uncertainty is unusually elevated, we stress that the consensus of strong growth and elevated inflation in early 2025 seems suspicious. Near-term risks to the economy and labor market are tilted to the downside and early-2025 inflation dynamics will likely also surprise to the downside. Given the high degree of data dependence, it would come as no surprise if Fed rate cut expectations are revised higher in three months.