Despite limited progress in reducing inflation in November, federal funds futures show a nearly 100% probability that the Fed will cut its benchmark interest rate by 25 basis points at its Dec. 17-18 meeting, analyst Megan Leonhardt said.
Although a December rate cut appears imminent, Leonhardt warned that Fed Chairman Jerome Powell could accompany that decision with guidance suggesting a pause in rate cuts early next year.
“Don’t be surprised if next week’s rate cut is combined with Powell’s statement that the Fed will pause rate cuts at the beginning of the year,” Leonhardt added, noting the directional challenges policymakers face in balancing economic signals.
Goldman Sachs reiterated its expectation of a December rate cut, saying it was a foregone conclusion. The investment bank also forecasts additional 25 basis point cuts in January and March 2025, with further cuts likely at the June and September meetings. However, Goldman noted that some members of the Federal Open Market Committee (FOMC) have expressed a willingness to slow the rate-cutting cycle earlier than initially expected, adding that there is increasing uncertainty about the pace of future cuts.
As a result, the risk of a pause at the January meeting is increasing despite current market expectations. Investors are pricing in a 97% chance of a 25 basis point cut in December, but stronger-than-expected economic data in November has raised concerns about the Fed’s path in early 2025.
All eyes will be on Powell's post-meeting speech and the Fed's updated economic forecasts this week, which are likely to provide important insights into the Fed's strategy for managing inflation, addressing fiscal policy challenges and responding to soft spots in the labor market.
*This is not investment advice.
