FOMC Rate Cut: Pace of Easing Expected to Slow
As anticipated, the Federal Open Market Committee (FOMC) decided to lower the target range for the federal funds rate by 25 basis points during today’s meeting. However, one member of the Committee dissented and preferred to maintain the rates at their current level. The post-meeting statement indicated a potential slowdown in further easing measures. Additionally, the median projection for 2025 in the “dot plot” was adjusted upwards by 50 basis points. This contrasts with the previous median forecast from September, where FOMC members were looking at a 100 basis point policy easing next year. The latest projections suggest only a 50 basis point rate cut for the upcoming year. The wide range of estimates in the dot plot for next year could be attributed to uncertainty surrounding the policy direction of the incoming administration, with a notable expansion in the core PCE inflation forecasts for 2025.
Fed Cuts Rates but Forward Guidance Is Hawkish
As widely expected by market participants, the FOMC reduced the target range for the federal funds rate by 25 basis points at the latest policy meeting. This move represents a total reduction of 100 basis points from the peak of 5.25%-5.50%, with previous adjustments of 50 basis points in September, 25 basis points in November, and another 25 basis points today. Despite the rate cut, the decision is viewed as “hawkish” due to several key factors.
Key Factors Influencing the Decision
Firstly, Beth Hammack, the president of the Federal Reserve Bank of Cleveland, dissented from the majority decision and voted to maintain rates at their current level. Chair Powell highlighted in the post-meeting press conference that the choice to cut rates by 25 basis points today was a close call compared to November. Secondly, there was a significant alteration in the post-meeting statement. The language shift from considering “additional adjustments” to evaluating the “extent and timing” of further rate changes suggests a potential pause in easing measures in the near future.
Projections and Uncertainty
The latest release of the quarterly Summary of Economic Projections (SEP) revealed slight adjustments in key forecasts. Real GDP growth for 2025 was revised slightly upwards, while the unemployment rate prediction edged down for the end of next year. Moreover, the core PCE inflation rate for 2025 saw an increase to 2.5%. The median dot in the dot plot also rose by 50 basis points for 2025, indicating a potential target range of 3.75%-4.00% by the end of the year.
Despite these projections, there remains a wide dispersion in the dot plot for next year, reflecting uncertainty regarding the policy agenda of the incoming administration. The range of core PCE inflation forecasts for 2025 has notably widened, indicating varying expectations among FOMC members. This divergence may be attributed to factors like potential tariff hikes and their impact on inflation levels.
In conclusion, the latest FOMC meeting suggests a likelihood of maintaining rates at the next meeting in January. However, the Committee is expected to continue easing policy in the upcoming year, albeit at a slower pace. Chair Powell’s remarks indicate a shift towards a more neutral stance in monetary policy, although it remains restrictive to a certain degree.
