MNI FED WATCH: After Rate Recalibration, Cautious Cuts In 2025
MNI (WASHINGTON) - The Federal Reserve is expected to close out the year with another quarter-point interest rate reduction Wednesday and signal further cuts to come, though at a slower pace and with more caution amid a slew of new uncertainties.
The December cut, already fully priced in by futures traders, will mark a cumulative 100 bps of easing this year, bringing the fed funds rate target to a 4.25%-4.5% range. The updated Summary of Economic Projections could show a median of 75 bp in cuts next year, a smaller drop than officials wrote down in September. Traders are pricing in about 78 bps of cuts for 2025.
Employment data since the last FOMC meeting have showed the U.S. labor market slowing to still healthy levels, but also inflation progress stalling out. Hiring rebounded last month after weather-related disruptions in October, and the unemployment rate ticked up to 4.2% but remains two-tenths below where policymakers expected it to end the year as of September.
Core PCE inflation increased 0.3% for a second straight month in October and is forecast to rise 2.8% on a 12-month basis in November, two-tenths more than policymakers' year-end expectation from September.
NEW RISKS
Nominal growth measures have also been strong, accelerating to above-5% levels that suggest inflation may drift further from the Fed's 2% target next year. A boost to productivity growth may account for some of it, but the Fed isn't hanging its hat on something that may only be knowable years in the future to finish the job on inflation. (See MNI POLICY: Fed Leans Into Prospect Of Productivity Upgrade)
Fed officials have been slowly marking higher their estimates of the neutral rate, another reason for slowing the pace of cuts next year. The median projection for the longer-run fed funds rate could rise to around 3% from 2.9% in September, analysts said.
The FOMC won't be incorporating into its forecasts the effects of potential shifts in trade and immigration under the incoming Trump administration, but are likely to err on the side of a cautious stance.
With the extension of tax cuts Trump signed into law in 2017, deficits are expected to grow, meaning higher borrowing costs over time as inflationary pressures never quite subsite, SEC economist Samim Ghamami told MNI. Worse, the policy mix could depress growth while keeping inflation elevated, forcing the Fed to maintain higher rates for longer, former Fed vice chair Alan Blinder said. (MNI INTERVIEW: Ex-Fed's Blinder Sees Stagflation Shock Ahead)
ON RRP TWEAK
Wall Street also sees a decent chance that the FOMC approves a 5 bp technical adjustment to the offering rate on standing overnight reverse repo operations, after Fed staff presented a case for widening the differential between the ON RRP and interest paid on reserve balances.
Lowering the ON RRP rate would put some downward pressure on other money market rates and potentially reduce usage of the repo facility and help reserves in the banking system stay ample for a while longer, the staff said.