US Federal Reserve Poised for Rate Cut: Powell Leads Policy Easing in December 2024

The U.S. Federal Reserve convened today, December 17, for its Federal Open Market Committee (FOMC) meeting to deliberate on monetary policy.

Analysts widely expect the Fed, led by Chair Jerome Powell, to announce another 25-basis-point rate cut on December 18, following two previous reductions in September and November 2024.

The current federal funds rate stands at 4.50%-4.75% after a series of easing measures aimed at bolstering economic growth.

“Widespread pessimism prevails across all sectors ahead of key policy decisions from the U.S. Fed, BoJ, and BoE,” noted Vinod Nair, Head of Research at Geojit Financial Services.

Alongside the Fed, the Bank of Japan (BoJ) and the Bank of England (BoE) will also announce their monetary policy updates this week.

In September, the Fed commenced its monetary policy easing cycle after maintaining rates at a 23-year high for over a year.

The September meeting saw policymakers predict further rate reductions totaling 50 basis points by the end of 2024, with additional cuts anticipated in 2025 and 2026.

Inflation Trends Challenge the Fed

While the Fed’s aggressive rate hikes between March 2022 and July 2023 succeeded in reducing inflation from 9.1% in June 2022 to 2.5%, recent months have seen inflationary pressures resurface.

The U.S. consumer price index (CPI) rose 2.7% year-over-year in November, up from 2.6% in October, reflecting higher costs in food and other sectors.

Progress toward the Fed’s 2% inflation target has stalled, with core inflation metrics showing no significant improvement over the past four months.

November’s inflation uptick has fueled speculation among Wall Street experts that the Fed might adopt a cautious approach to further rate cuts in 2025.

U.S. Economy Remains Resilient

Despite inflationary challenges, the U.S. economy continues to demonstrate resilience. Gross domestic product (GDP) grew at an annualized rate of 2.8% in Q3 2024, driven by robust consumer spending and a surge in exports.

While this marks a slight slowdown from Q2’s 3% growth, it underscores the economy’s durability, with growth exceeding 2% in eight of the past nine quarters.

The labor market also showed strength in November, with nonfarm payrolls increasing by 227,000 jobs, despite earlier disruptions from hurricanes and strikes.

However, the unemployment rate edged up to 4.2%, signaling a gradually cooling labor market. Analysts believe this easing could provide room for the Fed to proceed with another rate cut.

Implications for Financial Markets

Market sentiment remains focused on the Fed’s December 18 decision and Chair Powell’s subsequent commentary.

A dovish stance could bolster U.S. equities, particularly the S&P 500, while a hawkish tone may trigger market pullbacks. Inflation risks or fewer rate cuts could also strengthen the U.S. dollar, impacting global markets.

For India, a dovish Fed could attract foreign institutional investments, benefiting sectors like real estate and mid-caps.

Conversely, a hawkish Fed might lead to capital outflows, pressuring the Indian Rupee but potentially aiding export-driven industries like IT.

Navigating Inflation and Growth Dynamics

Former Kansas City Fed President Esther George expressed caution ahead of the anticipated rate cut, stating, “Let’s wait and see how the data comes in. Twenty-five basis points usually doesn’t make or break where we are, but it is a time to signal to markets and to the public that they have not taken their eye off the ball of inflation.”

Fed officials advocating for rate cuts argue that current policy does not need to remain as restrictive, given steady economic growth and a robust labor market.

Still, achieving the delicate balance of taming inflation without undermining economic momentum will require precise communication from Chair Powell and the FOMC.

Key Indicators to Watch

The Fed’s updated Summary of Economic Projections (SEP), including the dot plot, will provide crucial insights into future rate trajectories.

Markets anticipate a reduction in projected rate cuts for 2025, from four to two. Chair Powell’s press conference will also be closely scrutinized for signals on inflation forecasts and policy direction.

Outlook for 2025 and Beyond

The Fed’s dual mandate of promoting maximum employment and stable prices remains its guiding principle.

With inflation hovering above target and the economy growing at a steady pace, the Fed faces mounting pressure to carefully calibrate its monetary policy.

The December 18 decision and Powell’s statements will set the tone for 2025, shaping expectations across global markets.