Lump of Coal? A Hawkish Rate Cut
The Federal Reserve’s Federal Open Market Committee (FOMC) on December 18 lowered the federal funds rate target by 25 basis points, a quarter percentage point. The target range now stands at 4.25 percent to 4.5 percent, a full percentage point lower than the cyclical peak reached in September. This latest FOMC action was preceded by a 25 basis-point reduction in November and a 50 basis-point cut in September.
Why is the third interest rate cut in the last four months, an action that would typically be thought of as dovish, being widely described as hawkish instead? The answer has much more to do with expectations for the trajectory of rates in 2025 than it has to do with the level of rates in December 2024.
The December decision was accompanied by the FOMC’s latest set of quarterly economic projections, which imply a cumulative 50 basis points of rate reduction next year. Although some corners of the financial markets had already priced in this possibility, the FOMC’s latest projections were a significant contrast to September’s, which suggested 100 basis points of cuts were on the table in 2025.
The restrained prospects for policy easing evident in these economic projections were reinforced by the FOMC statement announcing the rate decision and Fed Chair Powell’s press conference following it. Together they throw cold water on hopes of further rapid rate cuts amid increasing concern about the inflation outlook.
Indeed, the latest Fed projection for core consumer inflation is for a 2.5 percent increase from the fourth quarter of 2024 to the fourth quarter of 2025. Although that would still represent a softening in inflation from its current rate, it is nonetheless markedly higher than was anticipated in projections made only one quarter ago.
December 20th, 2024
