• Futures News
• February 24, 2025

Strong Expectations for Fed Rate Cut in December

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In the ever-evolving landscape of global finance, the movements of the Federal Reserve—often referred to as the Fed—stand out as a beacon of scrutiny among economists, investors, and policymakers alikeAs the year draws to a close, anticipation mounts regarding the impending monetary policy decisions that the Fed will unveil in their meeting scheduled for December 18. According to a staggering 90% of surveyed economists, the central bank is poised to cut interest rates by 25 basis points, pushing the federal funds rate down to the range of 4.25% to 4.50%. This strong expectation of a rate cut is not merely conjecture; it is anchored in a variety of recent economic data and evolving circumstances.

One crucial piece of evidence informing this consensus is the latest job market report from the United StatesReleased last Friday, the data reveals that while employment growth has indeed slowed, it retains a layer of resilience

Jonathan Miller, a senior economist at Barclays, elaborates on how this data suggests there remains untapped potential within the labor marketAlthough income and employment figures continue to show robust growth, the persistence of slack—indicating that not all resources are being fully utilized—supports the likelihood of the Fed opting for another rate cut in DecemberThe futures market is echoing this sentiment, with nearly complete alignment in pricing: of the 103 economists surveyed, 93 assert that the Fed will act to reduce rates during their meeting between December 17 and 18, while merely 10 maintain that rates will hold steady.

However, the path forward for the Fed is laden with challenges, as numerous factors constrain and complicate their policymaking processAt the forefront of these concerns looms the specter of inflationProposed policies, such as those addressing import tariffs and tax reforms, are widely anticipated to exert upward pressure on inflation

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David Sewell, chief economist at Nomura, cautions that in the medium term, elevated tariffs and supply chain disruptions could propel core inflation above 3% by mid-2025. Furthermore, a recent survey revealed that 75% of economists perceive a heightened risk of inflation resurfacing in the US economy next yearThis rapidly evolving economic landscape is poised to drive a significant shift in the Fed's policy agenda following January 20, an outcome that should not be underestimated in its potential impact.

Adding another layer of complexity, the Fed itself employs a careful assessment of its target interest rate levelCurrently, the central bank aims to bring the federal funds rate to what it deems the "neutral" level, which it has estimated to be around 2.9%. Jerome Powell, Chair of the Federal Reserve, recently articulated that given the economy's resilient performance and inflation readings surpassing September’s forecasts, policymakers should approach forthcoming decisions with increased caution

Ultimately, this necessitates a delicate balancing act—navigating the interactions between economic growth, employment figures, and inflationary pressures while avoiding the pitfalls of either overheating the economy or stifling growth.

From a longer-term vantage point, economists exhibit considerable divergence in their forecasts regarding the Fed's trajectory in terms of rate adjustmentsApproximately 60% of surveyed economists (56 out of 97) predict that by the end of 2025, the Fed will need to execute at least three additional rate cuts—each by 25 basis points—potentially lowering the rate to between 3.50% and 3.75%, or even beyondHowever, this anticipated rate has diminished from more than 90% in October to just over 70% in November, signaling a shift in expectationsAccording to Miller at Barclays, disparities concerning the appropriateness of monetary policy and estimations of the neutral policy rate may intensify in the coming year as various viewpoints collide.

Moreover, the overall economic growth trajectory in the United States remains a critical consideration for the Fed

The economy's annualized growth rate for the last quarter was pegged at 2.8%, with projections suggesting 2.1% growth in 2025 and 2% in 2026. These anticipated figures surpass the Fed's officials' estimation for non-inflationary growth, which stands at a moderate 1.8%. As such, while robust growth offers a degree of leeway for the Fed's policy maneuvers, it simultaneously demands a level of prudence to avert overheating or a potential downturn.

As the upcoming December meeting approaches, the Fed is set to unveil its latest quarterly economic forecasts—a pivotal moment for market participants seeking to decipher the central bank’s future policy directionStakeholders across the spectrum are keenly observing how the Fed, amidst a confluence of complex factors and competing interests, will chart a course that serves both the long-term interests of the American economy and stabilizes expectations within the global financial market