TLDR:
- Fed expects headline inflation to rise to 2.7% annually in November, up from 2.6% in October, with core inflation holding steady at 3.3%
- Economists compare the Fed’s final push to reach 2% inflation to losing the “last five pounds” – a particularly challenging phase
- Reuters poll shows 90% of economists expect a 25 basis point rate cut on December 18, bringing federal funds rate to 4.25%-4.50%
- Most economists predict a pause in rate cuts for January 2025 while assessing policy impacts
- Inflation risks are expected to remain elevated in 2025, with 75% of economists citing high risk of resurgence
The Federal Reserve is preparing to make its final monetary policy decision of 2024, with most economists expecting a rate cut despite ongoing inflation challenges. According to a recent Reuters poll, 90% of economists predict the Fed will reduce interest rates by 25 basis points at its December 18 meeting, lowering the federal funds rate to 4.25%-4.50%.
The anticipated rate cut comes as inflation continues to prove stubborn. November’s Consumer Price Index (CPI) is expected to show headline inflation rising to 2.7% annually, up from October’s 2.6%. Core inflation, which excludes volatile food and energy prices, is projected to maintain its 3.3% rate for the fourth consecutive month.
While inflation has dropped considerably from its mid-2022 peak of 9%, progress toward the Fed’s 2% target has slowed in recent months. ADP chief economist Nela Richardson draws an analogy to weight loss, comparing the current situation to “trying to lose the last five pounds.” This final phase of inflation reduction could prove to be the most challenging for policymakers.
The labor market shows signs of cooling while maintaining resilience, giving the Federal Reserve room to consider rate cuts. Recent employment data indicates increasing slack in the job market, though income and job gains remain solid. This balance has strengthened the case for a December rate reduction.
Looking Ahead
Looking ahead to 2025, most economists expect the Fed to pause its rate-cutting cycle in January. Of the 99 economists surveyed, 58 predict the Federal Reserve will hold rates steady at its January 28-29 meeting, allowing time to assess the impact of new government policies.
The Federal Reserve’s current mission focuses on bringing the funds rate to a neutral position that neither restricts nor stimulates the economy. Fed officials estimate this neutral rate at approximately 2.9%. Fed Chair Jerome Powell has indicated that policymakers can take a measured approach in finding this neutral position, given the economy’s strength.
Beyond January, the path forward becomes less clear. Nearly 60% of economists predict at least three more 25-basis-point rate cuts by the end of 2025, potentially bringing rates to 3.50%-3.75% or lower. However, this majority has decreased from over 90% in October and more than 70% in November.
Wage growth remains a key consideration in the Fed’s decision-making process. While some reduction in wage growth may be necessary to achieve 2% inflation, timing is crucial. Current data from ADP shows workers’ wage gains barely keeping pace with inflation.
The U.S. economy grew at an annualized rate of 2.8% in the last quarter. Economists project growth of 2.1% in 2025 and 2% in 2026, exceeding the Fed’s estimated non-inflationary growth rate of 1.8%.
Inflation risks continue to demand attention, with 75% of economists rating the risk of inflation resurgence in 2025 as high. Only a quarter of surveyed economists consider this risk low.
Some economists, including Barclays’ Jonathan Millar, suggest that debates about monetary policy restrictiveness and neutral rate estimates may intensify in 2025. These discussions could influence the pace and extent of future rate cuts.
Bank of America economist Stephen Juneau notes that the Fed will likely wait to see which policies are implemented versus those that remain theoretical risks before making further rate decisions after December.
The Federal Reserve must balance multiple factors in its decision-making process. While inflation remains above target, the cooling job market and steady wage growth provide space for rate adjustments. The December meeting will also include the Fed’s latest quarterly forecasts, offering additional insight into their economic outlook.
Interest rate futures markets align with economist expectations, with a quarter-point cut nearly fully priced in for the December meeting. This consensus suggests strong market confidence in the Fed’s next move.
Market participants and economists continue to monitor economic indicators closely as the Federal Reserve prepares for its December meeting, with particular attention to inflation data and labor market developments.
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