MNI Fed Preview-Dec 2024: Greater Caution, Flatter Rate Path

EXECUTIVE SUMMARY: 

• The latest unemployment and inflation data have kept the FOMC on track to cut the federal funds rate by 25bp (to 4.25-4.50%) on Dec 18, but macro and political developments have heightened uncertainty over its the next moves.
• With the unemployment rate likely to undershoot September’s median projection along with core PCE inflation and GDP growth overshooting, the FOMC will undoubtedly signal a more cautious approach to easing.
• This will be communicated most clearly in the updated Dot Plot, which is set to show 75bp of cuts in 2025 – 25bp less than the 100bp in the last edition - with 2026, 2027, and the Longer-Run dot in line for increases.
• The hawkish risk at this meeting comes not just from a potential signalling of just 50bp of cuts in 2025, but negative market reaction to a higher terminal rate forecast, with a funds rate that settles above 3%.
• The new forecasts are not likely to explicitly incorporate anticipated policy shifts under the incoming Trump administration, but as with the corresponding post-election meeting in 2016 we expect the FOMC to discuss the macro and rates implications, with more participants seeing upside risks to inflation and rates.
• This could result in a hawkish flavor to the communications tone. While Chair Powell is unlikely to rule out a cut at the next meeting in January, reiterating that the Fed is moving meeting-by meeting while remaining confident inflation remains on a path to 2%, expect him to emphasize increasing uncertainty over the path ahead.
• Another area to watch includes a likely technical adjustment to an administered rate (ON RRP), though discussion on halting QT will probably not escalate until at least early 2025.

Note to readers: MNI’s separate preview of sell-side analyst summaries to follow on Dec 16