The market is 96% priced for a quarter-point rate cut from the Federal Reserve today, bringing the Fed funds rate down to a range of 4.25-4.50%, the future is much clearer.
Perhaps the best way to look at 2025 is a year-over-all view, as that is what the FOMC dot plot shows.
The median point from the Fed's September Summary of Economic Projections was 3.4%, down from 4.1% in the June forecast. It looks like that will be reversed, at least a little.
September dot plot
The market price of Fed funds income is 3.84% for the end of the year 2025, which is almost exactly for two more rate cuts next year. One of these is likely to be at a meeting in March, and the second is likely to be in July or September.
It wouldn't be surprising if the Fed's central rate stays where it is or rises to match market prices. If the dots show just one more hike it would be a hawkish surprise that moves markets.
Regardless, expect the FOMC statement and Powell's press conference to emphasize uncertainty and volatility. Economic data has improved since September but it is not a runaway economy and the inflation rate remains moderate with housing likely to experience more downward pressure next year.
What is very uncertain is what is coming on fiscal and trade policy. As a result, the Fed will want to wait and see at the Jan. 29 FOMC, which is right after the inauguration. By the March 19 meeting, they should have a much better handle on the state of the economy and the priorities of the incoming administration.
The challenge for Powell is to communicate patience but I don't see that as a particularly difficult minefield and – if anything – it's likely to be more painful than expected.
Another place to look is the GDP and unemployment forecasts. Here's the set from September:
GDP growth:
- 2024: 2.0%
- 2025: 2.0%
- 2026: 2.0%
- 2027: 2.0%
- Run further: 1.8%
Unemployment rate:
- 2024: 4.4%
- 2025: 4.2%
- 2026: 4.1%
- 2027: 4.2%
- Run further: 4.2%
GDP growth is running much closer to 3% while November's unemployment rate was 4.2% Of these numbers, I will be looking closely at the 2025 GDP forecast, although it subject to the same trade and fiscal caveats.
Overall, I think the market has overbought the 'hawkish cut' narrative, which is everywhere at the moment. Powell is a dove and is likely to remain one, highlighting the flexibility to cut if/when needed and that policy remains limited in scope.
