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Latest Fed Meeting Keys: Monetary Policy and Economic Impact
The Federal Reserve announced a 25 basis point rate cut during its monetary policy meeting on December 18, bringing the target range to 4.25%-4.50%.
Additionally, the Fed narrowed its projected rate cuts for 2025 to just 50 basis points. While these outcomes aligned with market expectations, the Fed’s hawkish pivot from a neutral stance caused significant declines in U.S. equity markets and Treasuries, while the U.S. dollar index surged.
Statement: Slower Pace of Rate Cuts Signaled, One Member Dissents
In its statement, the Fed reaffirmed its views on “sustained economic expansion,” a “cooling labor market,” and “balanced dual risks between inflation and employment,” consistent with its September stance of easing monetary policy constraints. However, the addition of the terms “timing and extent” in the language about “further rate adjustments” strongly suggests a slower pace of rate cuts going forward.
The Fed also reaffirmed its commitment to reducing holdings of Treasury securities, agency debt, and mortgage-backed securities to achieve its dual mandate of maximum employment and inflation returning to the 2% target. Unlike November, when all members supported the 25 basis point cut, this meeting saw one dissenting vote from Cleveland Fed President Beth M. Hammack, reflecting diverging views amid growing economic uncertainties.
Economic Projections: Upward Revisions to GDP and Inflation, Narrowed Rate Cuts in 2025
The Fed’s Summary of Economic Projections (SEP) raised growth forecasts for 2024 and 2025 to 2.5% (previously 2.0%) and 2.1% (previously 2.0%), reflecting stronger-than-expected recent economic performance. Concurrently, unemployment rate projections for 2024-2027 were slightly lowered to a range of 4.2%-4.3% (previously 4.2%-4.4%), reflecting diminished downside risks in the labor market.
Inflation forecasts were also adjusted upward, with core inflation now expected to decline more gradually. The Fed raised its projections for core inflation to 2.8% (from 2.6%) in 2024, 2.5% (from 2.2%) in 2025, and 2.2% (from 2.0%) in 2026, with the 2% target only anticipated to be reached by 2027.
(Source: Fed)
Market attention was particularly drawn to the Fed’s revised rate path. The median dot plot now projects a reduction in rates to 3.75%-4.00% in 2025 (previously 3.25%-3.50%), with a further cut to 3.25%-3.50% in 2026 (previously 2.75%-3.00%). The long-term neutral rate was lowered by 25 basis points to 3.00%-3.25% (previously 2.75%-3.00%), indicating a more gradual pace of rate normalization compared to September.
(Source: Fed)
Overall, the Fed’s latest rate decision and projections reveal a hawkish shift compared to November’s neutral stance. The return of Donald Trump as president and Republican control of Congress have also introduced new fiscal policy uncertainties, which appear to have influenced the Fed’s economic outlook and policy direction.
According to FedWatch data, market expectations for rate cuts next year have narrowed to just one 25 basis point reduction. The heightened uncertainty caused U.S. equities to plunge by 2%-4%, with the 10-year Treasury yield climbing to approximately 4.52%. Meanwhile, the U.S. dollar index surged above 108, reflecting increased market doubts about the pace of rate cuts in 2024.
(Source: CME FedWatch Tool)
Post-Meeting Press Conference Q&A Highlights
Q: Why officials think it’s appropriate to cut rates at all in 2025 if inflation is expected to remain firm throughout the year. And what would you expect at this point the timing might look like?
A: Today’s decision was a closer call, but we believe it is the right call to support maximum employment and price stability. The Fed continues to balance two-sided risks, with downside risks to the labor market now reduced. Moreover, inflation’s decline does not require further labor market cooling. Inflation has made significant progress; while current inflation appears flat due to low base effects, housing services inflation is steadily decreasing.
The slower pace of rate cuts projected for 2025 primarily reflects higher inflation expectations and increased uncertainty for next year. However, actual rate cuts will depend on incoming data. Further rate reductions will hinge on the progress of inflation improvements and the continued strength of the labor market.
Economic Growth
Q: Even though you’ve cut rates by a hundred basis points this year, we haven’t seen much change in mortgages, auto loan rates, or credit card rates. You say you’re significantly restrictive. Are you running a risk that the markets are fighting against you and the economy could be more at risk of a slowdown than you anticipate?
A: The rates that you talked about are really longer-run rates, and they’re affected—they are affected to some extent by Fed policy but they’re also affected by many other things. And longer rates have actually gone up quite a bit since September, as you well know, and those are the things that drive, for example, mortgage rates more than short-term rates do.
Most forecasters have been calling for a slowdown in growth for a very long time, and it keeps not happening. The U.S. economy is just performing very, very well, substantially better than our global peer group, and there’s no reason to think a downturn is any more likely than it usually is. So the outlook is pretty bright for our economy.
Trump Policies
Q: Is the current situation similar to the dynamic in 2016 during the last transition to a Trump administration, where the committee saw slightly tighter policy in part in expected anticipation of the fiscal policy stance that was seen evolving over the year. Some of it was a data mark-to-market exercise and some of it was the anticipation of fiscal. What’s the split on this one? How much of this was accounting for inflation data that was coming in and how much of it is expecting that there will be inflationary fiscal policy next year?
A: The slower pace of rate cuts next year can be attributed to several factors. 1)Stronger-than-expected economic growth 2)Reduced downside risks and uncertainty in the labor market 3) Higher inflation expectations for next year. 4)Greater caution as rates approach the neutral level.
Some officials have already factored the potential impact of new fiscal policies into their projections during this meeting. Policy uncertainty remains a key contributor to inflation uncertainty. When future paths become less clear, slowing down is a prudent approach.
Q: In September 2018 the Fed staff in the teal book discussed a policy of looking through any new tariffs as long as there were one-time increases and inflation expectations remained anchored. Could you comment on if that analysis remains effective, and any other thinking on tariffs generally that you can share?
A: The teal book’s simulations provide a good starting point, outlining two scenarios: one that ignores and one that incorporates tariff impacts on inflation. However, this is currently not a question the Fed can fully address because many uncertainties remain, such as which products will be tariffed, for how long, the scale of tariffs, and whether there will be retaliatory measures. For now, the Fed’s focus is on carefully evaluating and contemplating these issues, but it is too early to provide definitive answers.
Comparison of the December and November FOMC Statements
Recent indicators suggest that economic activity has continued to expand at a solid pace. Since earlier in the year, 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 Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.
In support of its goals, the Committee decided to lower the target range for the federal funds rate by 1/4 percentage point to 4-1/4 to 4-1/2 4-1/2 to 4-3/4 percent. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Michael S. Barr; Raphael W. Bostic; Michelle W. Bowman; Lisa D. Cook; Mary C. Daly; Beth M. Hammack; Philip N. Jefferson; Adriana D. Kugler; and Christopher J. Waller. Voting against the action was Beth M. Hammack, who preferred to maintain the target range for the federal funds rate at 4-1/2 to 4-3/4 percent.
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