In a significant move, the Federal Reserve announced a 25 basis points cut at its December 2024 meeting, aligning with market predictions. The updated dot plot indicates a target rate center of 3.9% for the upcoming year, a notable increase from the 3.4% projected during the September 2024 meeting. Furthermore, the Fed raised its inflation and economic growth forecasts while simultaneously reducing its unemployment rate predictions for 2025. Although Fed Chair Jerome Powell refrained from providing clear guidance on the “magnitude and timing” of future rate cuts, he expressed a robust confidence in economic growth.

The latest projections and Powell's statements reflect the Fed's heightened concerns about inflation. This most recent meeting was decidedly more hawkish than anticipated by the market, despite the institution's ongoing belief that it will implement two rate cuts in 2025. Analysts predict the Fed will likely pause on further rate cuts at its next meeting, potentially waiting until March for clearer guidance. As a result, increased volatility is expected in the stock market.

Key Takeaways from the December 2024 Federal Reserve meeting are as follows:

1) Regarding interest rates, the committee lowered the federal funds rate target range to 4.25-4.5%, which met market expectations. However, the decision did not receive unanimous approval from the Federal Open Market Committee (FOMC) members, with Cleveland Fed President Loretta Mester advocating for keeping rates unchanged.

2) In terms of the balance sheet, the Fed maintained its pace of reducing its balance sheet. The maximum amount for redeeming U.S. Treasury securities will be set at $25 billion per month, while mortgage-backed securities and agency debts remain capped at $35 billion monthly. Additionally, the overnight reverse repurchase rate was lowered by 30 basis points, aligning the technical adjustment with the lower boundary of the federal funds rate target range.

3) As for the economic outlook, recent indicators show that economic activity continues to expand at a steady pace. While employment growth has slowed and the unemployment rate has increased, figures remain low. Inflation is gradually moving towards the committee's target of 2%, yet it still remains higher than desired. The Fed aims for maximum employment and a sustained inflation rate of 2% in the long term. Confidence regarding inflation’s trajectory towards the 2% target has strengthened, with the risks to both employment and inflation seen as relatively balanced. Nevertheless, the economic outlook remains uncertain, acknowledging the dual challenges inherent in this endeavor.

4) The changes in the December 2024 meeting statement compared to previous meetings were minimal. The phrase “when considering further adjustments to the federal funds rate target range, incoming data, changing outlooks and risk balances will be carefully evaluated,” was rephrased to emphasize careful evaluation regarding “the magnitude and timing of further adjustments” to the rate target range.

The dot plot indicates that the target rate center for next year is set at 3.9%, higher than the 3.4% revealed during the September meeting. Additionally, projections for inflation and economic growth have been adjusted upward, while unemployment predictions have been revised downward.

Looking into 2025, the expected terminal rate is also projected to be at 3.9%, surpassing the earlier 3.4% estimate provided during the September discussion, which signals an additional 50 basis points in rate cuts next year. A closer examination of the specific votes in the dot plot reveals that one member supports maintaining a range of 4.25-4.5%, while three propose a 25 basis points cut, ten suggest a 50 basis point drop, three back a 75 basis point cut, one votes for a 100 basis point reduction, and another member calls for a 125 basis points decrease. Notably, the dot plot adjusts the long-term rate level upwards from 2.9% to 3.0% (following a hike from 2.8% to 2.9% in September), indicating the Fed's revised assessment of the neutral interest rate may continue to rise.

Judging by Powell’s remarks, he did not provide clear guidance on either the magnitude or timing of future rate cuts. His optimism about economic growth contrasts sharply with his cautious stance on inflation. Discussing interest rates, Powell noted several factors — economic growth, the job market, inflation, and the neutral rate — while implying that nearing a neutral rate could necessitate a cautious approach to cutting rates. Yet, he was vague when directly asked about the specific level of the neutral rate.

Moreover, Powell affirmed that he does not foresee increases in rates through 2025. On the employment market and economic growth fronts, his outlook was optimistic, noting a milder weakening of the job market compared to 2019 and expressing that risks to employment are diminishing. However, during discussions of inflation, Powell frequently referenced the progress made thus far, suggesting it might take one to two more years to reach the 2% target. His cautious demeanor indicated a lack of confidence in the inflation projections, only asserting a “confident” stance regarding inflation moving towards that target after receiving questions from reporters. The recent SEP forecast also shows that achieving the 2% inflation goal has been pushed back from 2026 to 2027.

The Fed’s evident anxiety regarding next year's inflation was more pronounced than what the market had widely anticipated. Coupled with the belief that two rate cuts are still likely in 2025, this indicates a clear hawkish sentiment from the central bank. Initially, many market participants expected the Fed’s approach to be a “hawkish cut” at this meeting, though the additional hawkish signs present deeper fears about inflation compared to previous forecasts.

Three primary conclusions can be drawn from Powell's communications: First, the Fed seems to be entering a new stage characterized by ambiguous future guidance, which is often worse for market perceptions than anticipated 25 basis points cuts as indicated in the dot plot. Expectations suggest the Fed will likely pause on rate cuts at the next meeting, potentially waiting until March for a clearer direction, contributing to rising volatility in stock markets.

After the December rate decision was made public, stock markets took a considerable hit, with the Nasdaq falling 3.56%, the S&P 500 declining by 2.95%, and the Dow Jones slipping by 2.58%, marking its tenth consecutive decline. The dollar index climbed above 108, and yields on 10-year and 2-year U.S. Treasury securities saw substantial increases. In the near term, as the Fed’s guidance remains vague, the previously optimistic “holiday trading” sentiment in equity markets may cool off, leading to increased volatility ahead of the upcoming Federal Open Market Committee meeting scheduled for January 29, 2025. Unless economic data dramatically shifts, analysts anticipate the Fed will most likely hold off on further cuts until clearer directions emerge, possibly waiting until March to provide additional insights.