Monetary Policy
- The FOMC announced yesterday it will reduce the Federal Funds target rate by 25 basis points to a range of 4.25 – 4.50%. This decision was expected by markets but was an 11-1 vote with Cleveland Fed President Beth Hammack voting to leave the target unchanged.
- This was the third consecutive rate cut, continuing a cycle that began in September which now totals 100 bps of decline in 2024.
- The updated policy statement was largely unchanged but did hint at a slower pace of future rate action in the forward guidance by adding that the FOMC will consider “the extent and timing” of additional adjustments to the target range.
- The meeting included a revised summary of economic projections from the 19 FOMC members, which features the widely anticipated “Dot Plot” of rate expectations. The median estimate now projects two rate cuts in 2025 to a Fed Funds rate of 3.9%, revised from four rate cuts in September’s projections. The 2026 projection also includes just two additional rate cuts rather than four for a rate of 3.4%. The longer run forecast that is approximated to be the “neutral interest rate” rose 10 bps from 2.9% to 3.0%.
- In his opening remarks, Fed Chair Powell said the FOMC “can be more cautious as we consider further adjustments to our policy rate.”
- Powell emphasized that the FOMC will remain data dependent and that “actual cuts we make next year will not be because of anything we wrote down today.” The committee will monitor progress on inflation and the state of the labor market as they consider additional rate cuts.
- Equity markets began the day modestly higher while Treasury yields were generally unchanged. Following the announcement and Powell’s press conference, equities sold off meaningfully while bond yields climbed. The S&P 500 closed the day down 3% while the 10-Year Treasury yield rose 11 bps from 4.40% to 4.51%.
Economic Projections
- Near-term inflation expectations were revised upwards with the median Core PCE forecast for 2025 and 2026 rising from 2.2% to 2.5% and from 2.0% to 2.2%, respectively. The 2027 median forecast remains at the Fed’s 2% target, though some are higher. During the press conference, Powell said that some members incorporated estimates of economic policy changes from the incoming administration into their forecasts while others said they did not do so, so there were different approaches to the projections.
- Unemployment is expected to remain stable near the current 4.2% rate.
- Projections for 2025 GDP rose slightly, from 2.0% to 2.1% while longer term projections remain around the 2.0% trend.
The FOMC is next scheduled to meet January 28th – 29th, 2025.
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