Markets are ready for another interest rate cut this week. They expect the Federal Open Market Committee (FOMC), the policy arm of the Federal Reserve, to stick with its lower interest-rate policy, setting the federal funds rate in a range 4.25–4.50 percent, down from the current rate of 4.50–4.75 percent.
However, the path to lower interest rates remains to be determined, as elevated inflation complicates the job of the nation’s central bank for future meetings.
This probability has climbed from 61.9 percent a month ago to 86 percent last week. At the same time, the likelihood of keeping the federal funds rate at the current levels has dropped from 38.1 percent a month ago to 14 percent a week ago and 4 percent on Dec. 15.
That’s thanks to the continuing slack in the labor market, as evidenced by rising initial jobless claims, a slowdown in payrolls, and the edging up of the unemployment rate. These data have prompted the nation’s central bank to switch policy priorities from targeting inflation to employment, from monetary tightening to easing.
However, the probability of further reductions in the federal funds rate drops to 18.5 percent for the January meeting, and then rises again to 52 percent for the March meeting.
This uncertain path to lower interest rates is due to inflation, the old villain of the U.S. economy (or any economy), remaining elevated. All three inflation measures—the Personal Consumption Expenditures (PCE) price index, the Consumer Price Index (CPI), and the Producer Price Index (PPI)—have been heading in the wrong direction.
Then there is the improvement in business and consumer conditions after the elections, which Steve Wyett, chief investment strategist at BOK Financial, believes could portend faster economic growth and higher inflation.
These developments make it hard for the Fed to decide its priorities and “balance risks,” to use the term Fed chair Jerome Powell has been using. Of the Fed’s dual mandate—maximum employment and so cut interest rates further, or price stability and keep interest rates unchanged until the inflation numbers move in the right direction—which should the Fed focus on?
“The labor market continues to scream for a rate cut, but inflation no longer appears to be sustainably moving toward the Fed’s 2 percent target, which Chair Jerome Powell has long told us is the condition for continued cuts,” Julia Pollak, chief economist at ZipRecruiter, told The Epoch Times via email.
Marc Chandler, chief market strategist at Bannockburn Global Capital Markets, doesn’t think the Fed should cut interest rates in the next meeting, but believes it will.
“Simply put, jobs growth was stronger than expected, CPI rose for the second consecutive month, as will the PCE deflator,” he told The Epoch Times in an email.
“Powell acknowledged the economy was stronger than expected—Atlanta Fed GDP tracker is above 3 percent, financial assets—stocks to crypto seem rich.”
However, he doesn’t see the nation’s central bank going against the fed funds futures, which point to a 96 percent probability of a 25 basis-point (bp) cut.
“The Fed rarely goes against such strong expectations,” he said. “In September, the CPI also came out during the Fed’s quiet period (as is the case now). Then, it seemed to many, including myself, that a Fed official (perhaps Powell) planted a story in the press to prepare the markets for a 50 bp cut, which was delivered. So, if the Fed is NOT going to cut now, it would likely prepare the market—maybe in a similar way.”
Still, Melissa Cohn, regional vice president at William Raveis Mortgage, doesn’t see another moderate interest cut significantly impacting the housing market, one of the economy’s most interest-sensitive sectors.
“While millions of potential homebuyers may be waiting for mortgage rates to fall finally—which hasn’t happened, despite Fed rate cuts, as average mortgage rates are still around 6.9 percent—one expert says we should probably settle in because this is likely the ‘new normal,’” she told The Epoch Times via email. “But she [the expert] doesn’t support much lower interest rates.”
Clark Bellin, president and chief investment officer of Bellwether Wealth, believes this week’s Fed meeting will be the next catalyst for equity markets.
“While a rate cut is expected, the Fed is also set to guide its interest rate plans in 2025, which could help determine the trajectory of stocks next year,” he told The Epoch Times via email.
“The interest rate picture is a bit uncertain for 2025 given the strong economy, and the Fed will have an opportunity to clarify its views about 2025.”
