Fed Cuts 25bp, Now Expects Only 2 Cuts in 2025

Meeting Highlights 

• As widely anticipated the Fed cut the funds rate by 25bp moving the target rate range to 4.25% – 4.50%.  The updated rate forecast, or dot plot, now sees another 50bp in rate cuts in 2025 vs. 100bp in the September forecast. That would put the year-end 2025 rate at 3.875%. The lowered expectation of cuts in 2025 was generally below the market consensus of 75bp in cuts and that has Treasuries and equities lower while the dollar is rallying. Cleveland Fed President Beth Hammack was the sole dissenter, not wanting to cut at all. This is somewhat surprising since this is just her third FOMC meeting.

 

• There was very little change to the statement. In fact, the only substantive change was from, “In considering additional adjustments to the target range….” to “In considering the extent and timing of additional adjustments to the target range…”. A clear indication of a slowing in the expected path of rate cuts which was reflected in the updated dot plot for next year.  The full side-by-side statement comparison is attached.

 

• Futures pricing prior to the announcement had 50bp of cuts for 2025. After the announcement, and dot plot projections, the futures market is now priced slightly more conservatively at just under just 50bp in cuts, preferring to remain under the Fed’s expectations.

 

• The long-run dot, or neutral rate estimate, was nudged from 2.875% to 3.000%. That’s the fourth straight increase in the so-called neutral rate forecast which had been at 2.50% since 2019. It’s a recognition that the post-pandemic economy is at a higher cost plateau than pre-Covid. The increase in the neutral rate remains below the lowered fed funds rate and is expected to remain so until 2027, indicating restrictive policy is expected to remain in place through next year. That will obviously be subject to incoming labor market data that may pressure the Fed to cut more aggressively if further cooling is noted. Or,  if inflation reignites it could slow the pace of 2025 rate cuts from the fresh two cut projection.

 

• On inflation, after the improving inflation picture during the summer, progress stalled somewhat in the final quarter. That led to the Fed upping its 2025 core PCE forecast from 2.2% to 2.5% reversing the decrease in the September forecast. We are currently at 2.8% which is where the Fed sees it at year-end. After last week’s CPI and PPI reports the market expects Friday’s November core PCE to tick up to 2.9% YoY despite a benign 0.2% MoM expectation (a 0.1% MoM result is rolling off from last year). The 2026 forecast was increased from 2.0% 2.2% then dropping to the 2.0% target in 2027. Thus, a recognition of the sticky nature of inflation in the last few months which will slow the move lower in the Fed’s view.

 

• As for the labor market, the Fed’s new forecast is for the unemployment rate to be 4.3% at year-end 2025 vs. 4.4% in the September call. That’s a recognition that despite the recent uptick, the Fed expects only marginally more weakness in 2025. With the 100bp in cuts since September, the Fed feels any additional labor market weakness will be limited.  For 2026 and 2027 the unemployment rate is also forecast to remain at 4.3%, similar to the September forecast.

 

• On GDP, the Fed has it at 2.5% for 2024 vs. 2.0% in the September forecast. One could see that large adjustment coming as GDP was running near 3.0% since the second quarter and the Atlanta Fed’s GDPNow model is forecasting a 3.2% fourth quarter. The pace is expected to slow to 2.1% next year then 2.0% in 2026 and 1.9% in 2027, slightly below the September forecast which had GDP bottoming at 2.0%.

 

• Overall, today’s reduced rate-cutting expectations for 2025 of two cuts was more hawkish than general market consensus at three cuts, but it is a recognition of the sticky nature of inflation and a belief that the labor market will not weaken much from its current level. The fourth straight increase in the median neutral rate estimate to 3.00% will keep the debate alive in 2025 over how restrictive policy is, especially with a wide range of estimates by members with a high of 3.75% and low of 2.375% (see dot plot below).

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Updated Dot Plot – Expected Rate Cuts in 2025 Reduced from 1oobps to 50bps

Source: Bloomberg

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