FOMC preview
The Federal Reserve is anticipated to reduce interest rates by 25 basis points during the Dec. 17-18 meeting. A subdued reading on November’s core PCE inflation—scheduled for release on Dec. 20 but already estimated with high accuracy by Fed staff using CPI and PPI data—has likely persuaded even the more inflation-focused officials to agree, albeit reluctantly, to another rate cut.
Attention will likely center on Federal Reserve Chair Jerome Powell’s outlook for the January meeting. We expect him to refer to the updated dot plot, which may indicate one fewer rate cut in 2024, rather than offering any explicit calendar guidance on the timing of future cuts.
Possible scenarios for the Dec. 17-18 meeting:
Rate Cut: A 25-basis-point reduction in the federal funds rate range to 4.25%-4.50%.
Economic Projections: Updated forecasts could show core PCE inflation for 2024 at 2.8% (up from 2.6% in September) and a slight reduction in the unemployment rate projection to 4.3% (from 4.4%).
GDP growth for 2024 may be sharply revised upward to at least 2.5%, compared to the previous forecast of 2.0%.
The updated dot plot is expected to reflect a federal funds rate of 3.6% by the end of 2025 and 2.9% by the end of 2026, implying 75 basis points of cuts in 2025 and another 75 in 2026. The longer-run rate projection is likely to remain unchanged at 2.9%. If 2026 core PCE inflation is projected at 2.2%, the implied real policy rate for 2025 would be moderately restrictive at 1.4%.
Powell’s likely remarks:
During the post-meeting press conference, Powell is expected to avoid specific calendar guidance on rate movements. Instead, he might hint at a slowdown in the pace of cuts in the coming year, emphasizing that this will depend on how the economic outlook aligns with the committee’s forecasts.
Technical adjustments:
The Fed is also expected to announce a 5-basis-point reduction in the overnight reverse repurchase agreement (ON RRP) rate. This adjustment aims to align the ON RRP rate with the lower bound of the federal funds rate target range, facilitating a reduction in the remaining balance—about $150 billion as of Dec. 11—in the reverse repo facility.
Dot plot indicates 75 basis points of cuts in 2025
The Federal Open Market Committee (FOMC) is expected to release an updated dot plot at the upcoming meeting. We predict that the median projection will reflect a federal funds rate of 3.6% by the end of 2025, suggesting a total of 75 basis points in rate reductions for the year. According to our analysis of the Fed’s hawk-dove spectrum, the dots are likely to align as follows:
Pause, skip, or hold?
During the post-meeting news conference, Fed Chair Jerome Powell will likely provide hints about the future path of interest rates. Interpreting his statements will require careful attention to the nuances of his wording.
The distinction between terms like “pause,” “skip,” and “hold” is particularly significant:
“Skip”: Indicates a temporary decision to leave rates unchanged, with the intention of resuming the previous rate trajectory later.
“Hold”: Suggests a longer period of steady policy rates without further adjustments.
“Pause”: Has a broader meaning, potentially signifying either a brief or extended period of inaction.
DXY holding below 107.0
The rally of the US Dollar Index, which started following the Federal Reserve’s initial rate cut this year and continued after the US elections, has stalled since November 22nd. The index has remained within a narrow range, staying below the 107.0 resistance level, while finding some support above 105.50.
Today’s decision is expected to significantly influence the market, especially if it brings any unexpected outcomes, particularly if the Federal Reserve hints at a potential pause in upcoming meetings. However, traders should avoid overreacting to initial movements; it’s better to wait for clarity before making any trading decisions. Additionally, as we approach the end of December, market volatility is likely to decrease in the coming days as the holidays approach.
Prepared by Nour Hammoury, Chief Market Analyst at SquaredFinancial
Nour is an investor, independent market strategist, and financial advisor. He holds a BA in Finance and Banking Science from Al-Ahliyya Amman University and a CFTe in Economics from the International Federation of Technical Analysts. He has more than 15 years of experience in forex, stocks, and global economic developments, as well as central bank policies and intermarket analysis. He appears regularly on major international TV networks, such as BBC, Al-Jazeera, Al Hurra, CNBC, and Bloomberg, holding open discussions and sharing insights and readings of the markets and trends.
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