Financial markets anticipate a federal rate reduction in December, yet the future course of monetary policy remains uncertain.
Financial markets anticipate a federal rate reduction in December, yet the future course of monetary policy remains uncertain.
The United States Federal Reserve is set to unveil its next policy decision on December 18, and most analysts predict a 0.25% rate reduction. However,there's less clarity regarding the Federal Reserve's policy beyond this week. More rate adjustments are on the horizon, but variations in the scale and tempo of anticipated future rate adjustments could significantly sway markets.
This week sees a barrage of American economic data releases, including November retail sales, industrial production, personal income, personal expenditure, and numerous housing data points. However, the December Federal Reserve announcement holds the most potential to impact the market in the coming days. Moreover, due to its status as one of the year's final significant data points and the anticipated decrease in market volume the following week, this announcement might exert more influence on the market than usual.
The Federal Reserve will divulge its next interest rate policy decision on December 18 at 2 p.m. ET. Along with this announcement, they will release Federal Open Market Committee projections, followed by a press conference with Chair Jerome Powell at 2:30 p.m. ET.
A 0.25% rate reduction appears to be a foregone conclusion. Since September, Prestige Economics has foreseen this change, and previous Federal Reserve projections from September 18 also hinted at another rate reduction this year.
According to the CME FedWatch Tool, as of December 15 at 11:04 a.m. ET, the likelihood of a 0.25% rate cut on December 18 was 96%, while the possibility of no policy modifications was just 4%.
Examination of FOMC Projections
Along with the December Federal Reserve policy announcement, the quarterly FOMC forecasts will be released. These predictions are generally accepted due to the fact that the majority of FOMC members are in charge of setting policy and making voting decisions.
The FOMC forecasts are presented in a table that provides information on anticipated future interest rates, GDP growth, PCE inflation, and unemployment rates. Furthermore, interest rate projections are depicted using a graphic called the dot plot, which shows anonymous individual FOMC member predictions of future interest rates.
On September 18, the dot plot of median FOMC member predictions showed that Fed members anticipated the federal funds rate would be at 3.4% at the end of 2025 and 2.9% at the end of 2026.
Fed member forecasts of future real GDP growth were somewhat positive in September, and FOMC projections indicated the expectation of easing inflation, even though year-on-year PCE and year-on-year PCE core were expected to remain above the Federal Reserve's 2% target in both Q4 2024 and Q4 2025.
Market Impacts of Federal Reserve Policy and FOMC Projections
The FOMC projections and the associated interest rate dot plot have the potential to significantly shift markets during the week's Federal Reserve meeting.
Investors, market gurus, and economists will scrutinize the updated FOMC projections and Chair Powell's press conference for clues about future inflation levels, growth, unemployment, and Federal Reserve interest rate policy.
Projections revealing more rate cuts than in September 2024 seem improbable, leaving two more viable possibilities: relatively stable FOMC interest rate projections or projections indicating slower and/or fewer interest rate cuts.
The most probable scenario for the December FOMC projections appears to be that they will remain relatively unchanged. In such a situation, the influence on equities, bond prices, oil prices, and industrial metal prices would likely be favorable. However, the dollar and bond yields would likely decrease.
If the December FOMC projections suggest fewer and/or slower rate cuts, bond yields and the dollar would likely increase. In contrast, equities, bond prices, crude oil prices, and industrial metal prices would likely be under pressure due to expectations of a more gradual easing of interest rates and a strengthening of the greenback.
What do you think the Federal Reserve will declare this week?
Will policy projections remain largely unaltered—or will a modification in the scale and tempo of anticipated interest rate cuts be reflected in the dot plot?
Let me know in the comments below.
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The Federal Reserve's monetary policy decision on December 18 is expected to include a 0.25% interest rate reduction, with the likelihood of this occurring being high according to the CME FedWatch Tool.
The Federal Open Market Committee (FOMC) projections, released alongside the interest rate decision, will provide insights into future interest rates, GDP growth, PCE inflation, and unemployment rates for investors, market analysts, and economists to interpret.
The FOMC projections and the associated interest rate dot plot can significantly impact markets during the Federal Reserve meeting. If the projections suggest fewer and/or slower rate cuts, it could lead to an increase in bond yields and the dollar, which in turn might put pressure on equities, bond prices, crude oil prices, and industrial metal prices.
This week's Federal Reserve announcement has the potential to exert more influence on the market than usual due to its status as one of the year's final significant data points and the anticipated decrease in market volume the following week.