Markets Expect A December Fed Rate Cut, But Future Policy Is Uncertain

The U.S. Federal Reserve will release its next policy decision on December 18, and an interest rate cut of 0.25% is widely anticipated. However, expectations for Fed policy beyond this week are less certain. More rate cuts are coming, but changes in the size and pace of projected future rate cuts could move markets significantly.

Upcoming Fed Meeting on December 18

This week includes a bevy of U.S. economic data releases, including November retail sales, industrial production, personal income, personal spending, and a slew of housing data. However, it is the December Fed decision that embodies the biggest potential to be a market mover in the week ahead. Plus, this Fed announcement is likely to be even more critical for markets than usual, as it is one of the last big data points of the year and market volumes are likely to fall next week ahead of the holidays.

The Fed will announce its next interest rate policy decision on December 18 at 2 p.m. ET. along with a release of Federal Open Market Committee projections. A press conference by Fed Chair Jerome Powell will occur at 2:30 p.m. ET immediately following the publication of the Fed statement.

A Fed rate cut is widely anticipated. Prestige Economics has been forecasting this rate cut since September, and the last set of Fed projections from September 18 also reflected expectations of another Fed rate cut this year.

According to the CME FedWatch Tool, the chance of a Fed interest rate cut of 0.25% on December 18 was 96% as of December 15 at 11:04 a.m. ET. The odds of no change in Fed policy was only 4%.

ForbesRise In October Consumer Inflation Is Not Enough To Stop Fed Rate CutsBy Jason Schenker

FOMC Projections From The Fed Meeting Will Be Watched Closely

The quarterly FOMC forecasts will be released along with the December Fed policy statement. These projections are viewed credibly, because most of the members of the FOMC are the same people who set Fed policy and vote on Fed decisions.

The FOMC projections appear in a table that reflects expectations for future interest rates, GDP growth, PCE inflation, and the unemployment rate. Interest rate projections also appear in a graphic depiction that economists and investors refer to as the dot plot, which shows anonymized individual FOMC member forecasts of future interest rates.

On September 18, the dot plot of median FOMC member forecasts conveyed that Fed members expected the federal funds rate to be at 3.4% at the end of 2025 and 2.9% at the end of 2026.

Fed member forecasts of future real GDP growth were relatively positive in September. Plus, FOMC forecasts reflected expectations of easing inflation, although year-on-year PCE and year-on-year PCE core were projected to remain above the Fed’s 2% target in both Q4 2024 and Q4 2025.

Market Impacts of Fed Policy And FOMC Projections

FOMC projections and the associated interest rate dot plot are the biggest factors that could move markets as part of this week’s Fed meeting.

Investors, market mavens, and economists will parse the updated FOMC projections—and Fed Chair Powell’s press conference—for hints about the future states of inflation, growth, unemployment, and Fed interest rate policy.

Projections reflecting more rate cuts than in September 2024 seem unlikely, leaving two more credible scenarios: relatively unchanged FOMC interest rate projections or projections reflecting slower and/or fewer interest rate cuts.

The most likely scenario for the December FOMC projections appears to be that they will remain relatively unchanged. If that were to be the case, the impact on equities, bond prices, oil prices, and industrial metals prices would likely be supportive. However, the dollar and bond yields would likely fall.

If the December FOMC projections reflect fewer and/or slower rate cuts, bond yields and the dollar would likely rise. However, equities, bond prices, crude oil prices, and industrial metal prices would likely come under pressure due to expectations of a slower easing of interest rates and the accompanying strengthening in the greenback.

What do you expect the Fed will announce this week?

Will policy projections remain largely unchanged—or will there be a change in the magnitude and cadence of anticipated interest rate cuts be reflected in the dot plot?

Let me know in the comments below.

Also, be sure to subscribe to my YouTube channel and visit Prestige Economics and The Futurist Institute for additional content about the economy, financial markets, inflation, and Fed policy.