Fed Lowers Rate as Expected
The Gist
The Federal Reserve announced a 25 basis point rate cut at its December 2024 FOMC meeting, lowering the federal funds target range to 4.25%—4.50%. Furthermore, it will continue reducing its Treasury securities, agency debt, and agency mortgage-backed securities (MBS) holdings. The policy statement summarizes that "economic activity continued to expand at a solid pace... labor market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made progress toward the Committee's 2 percent objective but remains somewhat elevated."
The Color
Alongside the rate decision, the Federal Reserve released updated economic projections for 2025 and beyond. Median projections for GDP growth in 2025 were revised upward to 2.1%, from 2.0%. The unemployment rate is expected to increase slightly from 4.2% in 2024 to 4.3% in 2025. As measured by the Personal Consumption Expenditures (PCE) index, inflation is projected to climb to 2.5% in 2025, with core PCE expected to decline to 2.4%. Given these projections, members anticipate a median 3.9% fed funds rate in 2025 vs a 3.4% previous estimate. The most significant changes in the projections come from the inflation estimates, as the median readings for the next two years increased by 20-30bps.
In his post-meeting press conference, Fed Chair Jerome Powell admitted that the decision to cut was close as the committee steered between a cooling labor market and stubborn inflation. Powell highlighted that while the unemployment rate remains strong, the labor market is slightly cooler than pre-covid. He further emphasized the fact that the US economy remains strong.
The Takeaways
The Fed's decision to cut rates reflected the tight balance the FOMC must strike between its dual mandate. It is also important to remember that the Fed continues reducing its balance sheet, which should continue helping drive inflation lower. Furthermore, Beth Hammack, President of the Cleveland Fed dissented from the rest of her peers in voting to maintain the policy rate unchanged; however, she will not be part of the FOMC next year and will assume the role of an alternate member*. As of writing, there is a 91% probability that the policy rate will remain unchanged at the January FOMC meeting, according to the CME FedWatch Tool.
*The FOMC comprises the Chair (Powell), the Vice President (always the President of the NY Fed), six governors, and five rotating regional Fed Presidents.
You can read the press release here.
You can see the Summary of Economic Projections here.
You can watch the press conference here.