Anticipation is mounting as the Federal Reserve prepares for its final interest rate decision of 2024 during the FOMC meeting on December 17-18. Economists largely predict the Fed will announce a 25 basis point reduction, marking its third consecutive cut this year aimed at alleviating inflation pressures.
The backdrop to this pivotal meeting is complex, with inflation remaining stubbornly high and the economic outlook increasingly uncertain. Inflation, which saw its peak at 9.1% in June 2022, has moderated somewhat, but the most recent Consumer Price Index (CPI) figures are still above the coveted 2% target, signaling to Fed officials like Chair Jerome Powell and other members of the FOMC the battle against rising prices is far from over.
Boston Fed President Susan Collins, who’s been vocal about the necessity of clearer communication from the Fed, emphasized the importance of public awareness concerning Fed actions and their real-world ramifications. “It's important for people to understand the role of the FOMC or monetary policy at the Federal Reserve because of the importance of price stability and maximum employment for people's everyday lives,” Collins stated. Her aim is to bridge the gap between complex economic policies and the average person’s daily financial experiences.
Expectations are high, with about 90% of surveyed economists anticipating the Fed's rate cut. If the cut goes through, it would lower the federal funds rate to between 4.25% and 4.5%, down from the current range of 4.5% to 4.75%. But as the market braces for this shift, traders are eagerly watching for the Summary of Economic Projections (SEP) to glean insights about future monetary policy, particularly concerning 2025.
Analysts highlight the significance of this meeting, referencing the uncertainty surrounding the policies of President-elect Donald Trump. His proposals may introduce inflationary pressures, altering the Fed's calculus for interest rates. Trump's earlier statements about imposing tariffs on imports could ripple through the economy, leading to higher consumer prices and complicate the Fed's mission to facilitate economic stability.
Meanwhile, global markets including India felt the jitters as investors adopted caution. The Indian market reflected this sentiment, with stock indices like the Sensex and Nifty closing lower. Risk aversion was evident as these indices fell by 0.5% and 0.4%, respectively. Public sentiment mirrored the cautiousness seen globally, with many waiting to see how the Fed’s decisions impact market stability.
With the Fed's last meeting under the Biden administration taking place now, the direction of monetary policy may pivot significantly under the new leadership. The heightened uncertainty of Trump's potential policies could play a pivotal role, with analysts speculating on how the Fed may adjust its approach following the newly implemented policies. This makes the December meeting not just about immediate policies but also about foresight and strategy for 2025 and beyond.
On the economic side, the job market continues to show signs of strain, which has also influenced the Fed's recent decisions to lower rates. The unemployment rate has crept higher over the past year, igniting concerns among policymakers about labor market weaknesses. Economists believe this trend contributed to the Fed’s recent cuts.
Across the board, the anticipated decision has had tangible effects on various sectors, including precious metals. Gold prices increased slightly, responding redundantly to expectations of looser monetary policy, which tends to benefit non-yielding assets. The changing dynamics of interest rates are one of the many factors investors are considering as they prepare for the Fed's announcements.
Looking ahead, it’s clear the Fed's future decisions will likely be heavily influenced by economic indicators, Trump’s administration policies, and the broader global economic climate. While this meeting may mark the end of one chapter, the Fed is poised to navigate through new challenges as it heads sustainably toward economic recovery.
Investors and businesses alike will remain anxious over how the Fed’s interest rate cuts zip through the economy and influence overall financial health, especially as they brace for the incoming Trump administration which proposes policies with potential inflationary effects.
Overall, the market remains skeptical but hopeful as traders wait for the Federal Reserve’s December decision and what it will mean for the broader economy as we move toward 2025.
