Federal Open Market Committee announcement

At the December 2024 Federal Open Market Committee (FOMC) meeting, the Federal Reserve (Fed) lowered interest rates by 25 basis points. This lowers the target interest rate range to 4.25% to 4.5% and reflects the Fed’s ongoing commitment to achieving its dual goals of maximum employment and price stability.¹

Equity markets sank nearly 3% immediately after the decision on the hawkish rate cut Wednesday, as interest rates across the curve rose by around 10 basis points. We had believed that equity valuations were extended, so this slight correction helps to bring valuations into a more realistic place. By Thursday morning, markets were trending up again.

The Fed’s decision marks a third consecutive rate cut, following a 25-basis-point reduction in November and a more aggressive 50-basis-point reduction in September. The September cut was particularly noteworthy as it was the first in over four years, signaling a shift in the Fed’s priorities – the Central Bank began to see a slowing labor market as a more pressing concern than inflation. Since then, the labor market has slightly rebounded and risks to the downside have receded.

Changes in the FOMC statement

The FOMC statement showed minimal changes, including the rate cut and insights into potential future adjustments. The statement introduced a new qualifier on the "extent and timing" of future rate cuts, suggesting a slower pace in 2025 than previously anticipated.²

While four participants supported the December rate cut, there was one dissenting member, Beth Hammack, who preferred to maintain the current rates.³

What does this mean for investors?

Overall, we believe that the Fed will be cutting rates but at a slower rate next year for mostly good reasons: economic growth has been stronger than expected. That has meant that inflation has been stubborn at around a 2.5% pace. We see this as an indication that investors should focus on adding assets that can provide a defensive posture and diversified sources of income.

A deeper look: Summary of Economic Projections revisions

The Summary of Economic Projections (SEP) revealed that the median FOMC participant is penciling in just two 25 basis points of cuts in 2025, down from the four projected in September.⁴

The SEP showed upward revisions in policymakers’ 2025 year-end growth to 2.1% from 2% and to core inflation, which was revised up to 2.5% from 2.1%. Additionally, the unemployment rate was revised downward to 4.3% from 4.4%,⁵ reflecting stronger-than-expected economic growth.

Overall, the December SEP suggests continued economic expansion, with a resilient macroeconomic backdrop despite some weakening in the labor market and bumpy inflation.

Key highlights from the meeting

• Growth: The Fed increased its GDP growth forecast to 2.5% for 2024, indicating a stronger economy than anticipated.
• Inflation: The Fed raised its inflation projections for next year by 40 basis points to 2.5%.
• Policy Path: The Fed raised its expectations for future policy rates by 50 basis points in both 2025 and 2026.

To what extent are President-elect Donald Trump's proposals incorporated in these economic projections?

A hot topic for questions during Fed Chair Jerome Powell’s press conference was the degree to which President-elect Donald Trump’s proposals on trade, taxation and immigration were factored into these economic projections.⁶

In response, Powell said the Fed is “modeling and evaluating Trump’s proposals but not yet incorporating them into decisions” because it is “unclear” what the policies will actually be. According to Powell, some participants began to “incorporate highly conditional estimates of economic effects of policies into their forecasts at this meeting,” while some did not and others “didn’t say whether they did or not.”⁷

Going forward, Powell emphasized that the Fed “will have a much clearer picture” of the path for monetary policy when the policy changes materialize.⁸

Important insights from Powell’s press conference

In his post-FOMC press conference, Powell highlighted the committee’s overall belief that December’s rate cut “was the best decision to foster achievement” of the Fed’s dual mandate. Again, he emphasized the Fed is carefully navigating its two-sided risks:

1) “Move too slowly and needlessly undermine economic activity in the labor market.”

     Or

2) “Needlessly undermine our progress on inflation.”⁹

Regarding the economy, Powell stressed that it is in “a really good place,” despite some moderation in economic data throughout 2024. He emphasized that has “made great progress” throughout 2024. Consumer prices have decelerated to a 2.7% year-over-year increase from 3.1% at the start of the year. Still, Powell said he wants to “see further progress on inflation” and the labor market as they “think about further cuts.”¹⁰

On the labor market front, Powell expects the Fed’s “significantly less restrictive” policy stance to support employment. This follows November’s labor market data, which showed a robust rebound from the prior month and suggests that the economic backdrop is more balanced.

Going forward, Powell reiterated monetary policy decisions will continue to be made on a “meeting by meeting” basis with data leading the way. This measured approach allows the committee to carefully assess the evolving outlook and the balance of risks.¹¹

Bottom line

We expect the Fed to continue gradually easing to normalize policy in 2025 while supporting the cooling labor market. The Fed will be cautious and go slow as it approaches the neutral rate.

We anticipate the Fed may leave rates unchanged in the January meeting, as they continue to evaluate incoming economic data and slow their path ahead. However, Powell reiterated that the direction of travel for the policy rate still looks lower, not higher.