We have a week jam-packed full of major central bank meetings and some top tier data ahead of the festive period and new year. The marquee event will be tomorrow’s FOMC meeting where the Federal Reserve is expected to cut by a further 25bp to 4.25% – 4.50%. The central bank has already cut rates 75bps over the past two meetings, but it may signal caution on further easing in the months ahead.
Inflation data has been sticky in recent months and not making any real progress towards target. But the Fed’s dual mandate means that it also has to pay close attention to what is happening in the jobs markets. Clear signs of cooling with payrolls growth slowing and unemployment shifting higher justifies the Fed moving policy closer towards neutral. However, it is clear that the pace of rate cuts will slow in 2025. Only if inflation starts to make more rapid progress towards the 2% target or the jobs market deteriorates markedly do we see more policy easing, and that doesn’t look likely at this point.
Changes to dot plot and projections
Consensus expects to see the median dot plot point to the prospect of three 25bp rate cuts in 2025 in its forecast update, down from the four 25bp cuts it suggested in its September projections. Growth and inflation forecasts are predicted to edge higher with the latter rising to 2.8% from 2.6% in September. That potentially means the Fed pausing on rates in January, amid concerns about rising inflation risks (and incoming Trump policies). Currently money markets see just a 16% chance of another cut next month.
There may be some focus on the longer run Fed Funds rate, currently 2.9%, for clues about how much the Fed could cut rates ahead. Markets will also watch the tone of Chair Powell’s post-meeting remarks. Any colour on the incoming new administration will be seized upon, but it unlikely at this stage.
Market Reaction
Markets have priced in a 25bps cut and the sense of a “hawkish cut”. That means a pronounced hawkish tone is required to put downward pressure on equity valuations, especially growth stocks that are more sensitive to higher rates. The Nasdaq has been powering ahead and making new record highs virtually every day. Investors might consider rotating into defensive sectors like utilities and consumer staples if the Fed signals a slower pace of cuts. That could see the underperforming Dow Jones index steady after multiple straight days of selling.
USD typically suffers well-known year-end seasonality, with selling amid current stretched positioning. But unless the Fed signals a more dovish path than the market implies, any dollar dips may be seen as a buying opportunity. The Trump administration’s potential pro-dollar policies, such as tariffs, could support the USD in 2025.