Federal Reserve’s Rate Cut Decision: A Shift in Expectations for 2025
As the Federal Reserve prepares to announce its decision on interest rates, investors are confident that a final rate cut will be implemented this week. However, the bigger question on everyone’s mind is whether the central bank will reassess its expectations for 2025.
The Dot Plot: A Key Indicator of Fed Policy
The dot plot, a chart updated quarterly, provides valuable insights into the predictions of each Fed official regarding the direction of the federal funds rate. In September, the dot plot revealed a consensus among Fed officials for two more rate cuts in 2024 and four small additional reductions in 2025. But with recent stubborn inflation readings and cautious commentary from Fed officials, the 2025 projection is now in question.
A Rethink of 2025 Projections
Former Cleveland Fed president Loretta Mester believes that the prior prediction of four rate cuts in 2025 needs to be reevaluated, citing a “slowing down” for next year. She predicts two or three cuts in 2025, a more conservative approach. However, some Fed watchers disagree, arguing that Fed officials will stick to their estimates for four cuts in 2025.
Inflation Remains a Concern
The latest inflation data from the Bureau of Labor Statistics shows that the Consumer Price Index (CPI) increased 2.7% over the prior year in November, a slight uptick from October’s 2.6% annual gain in prices. Wholesale prices also rose more than expected in November, adding to the string of sticky inflation prints. These developments have led some economists to question the Fed’s ability to achieve its 2% inflation goal.
Fed Chair Jerome Powell’s Cautious Approach
Fed Chair Jerome Powell has left room for the Fed to adopt a slower pace if needed, citing the economy’s strength. This cautious approach may lead to a pullback in expectations for 2025, especially given the recent inflation readings and labor market developments.
Labor Market Weaknesses
The job market has not shown any new signs of weakness, and demand for labor is dropping. Wilmington Trust chief economist Luke Tilley sees a 35% chance of a recession due to labor market weaknesses. He predicts that private sector job growth will slow down to almost 100,000 jobs a month.
Fed Watchers’ Predictions
Some Fed watchers, such as Wilmer Stith, bond portfolio manager for Wilmington Trust, still expect four rate cuts in 2025. They believe that Fed officials will focus on the progress made on shelter prices and other segments of CPI, which bodes well for achieving the inflation goal.
A Rate Cut This Week, But Then What?
While a rate cut is still likely this week, some experts predict a pause in January. The Fed may need to reassess its policy path in light of recent developments, including the impact of prospective fiscal policy actions.
The Road Ahead
As the Federal Reserve navigates the complex landscape of inflation, labor market developments, and fiscal policy, investors will be closely watching the dot plot and Fed officials’ commentary for clues on the direction of interest rates in 2025. One thing is certain – the path ahead will be shaped by a delicate balance of competing factors.
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