With persistent inflation and a resilient economy, the Fed's updated projections show two rate cuts next year.
The pace of interest rate cuts will slow in 2025 as the Federal Reserve (Fed) released its updated Summary of Economic Projections (SEP) and dot plot as part of its December 17-18 Federal Open Market Committee (FOMC) meeting decision, which saw the Fed elect to reduce rates for the third consecutive meeting.
“This was a hawkish cut by the Fed, where it accepted that it would take a longer time to bring down inflation,” said Raymond James Chief Economist Eugenio Alemán. “At the same time, Fed Chair Jerome Powell indicated that the decision to cut was a ‘close call.’ This is the first time he has indicated that the meeting decision was more difficult than expected.”
As inflation remains sticky and the U.S. economy continues to demonstrate its resilience, the Fed found it appropriate to update the number of forecasted rate cuts in 2025, revising down the four projected cuts in the September SEP to two with this latest SEP and dot plot. The SEP also indicated two reductions in 2026 and one in 2027.
Markets were not pleased with the updated dot plot projections, which led to the Dow Jones Industrial Average falling into negative territory for the 10th straight day, its longest losing streak since 1974.
“We have highlighted that we are less concerned about the number of cuts and more focused on the overall trajectory of the economy. As the Fed is reducing rate cuts for the right reasons, preemptively, to ensure the strong underpinning of the economy, the trajectory of the equity market should remain higher longer-term, as earnings are supported to the upside,” said Raymond James Chief Investment Officer Larry Adam. “However, with the equity market ‘priced to perfection’ as valuations are near multi-year highs, it was not surprising to see volatility move higher following the meeting decision.”
“Given the historically high level of optimism surrounding the prospects for the economy, the Fed, President-elect Trump’s policy agenda and the equity market, disappointments can lead to periods of volatility like what occurred post-meeting decision,” noted Adam. “This is a theme that is likely to play out more in 2025, as our team expects volatility to remain elevated.”
The 0.25% cut at the December meeting lowers the federal funds rate target range to 4.25%-4.50% and brings the Fed’s total rate cuts in 2024 to a full percentage point, following a 0.50% cut in September and a 0.25% reduction in November.
“We have lowered our policy rate by a full percentage from its peak, and our policy stance is now significantly less restrictive,” said Fed Chair Jerome Powell at his post-meeting press conference. “We can, therefore, be more cautious as we consider further adjustments to our policy rate.”
The most important changes to the Fed’s projections were for the rate of inflation, which in 2024 increased from 2.3% to 2.4% while the rate for 2025 increased from 2.1% to 2.5%. For 2026 the rate of inflation increased from 2.0% in the September SEP to 2.1%, while it expects inflation to hit the target in 2027, at 2.0%.
The SEP also increased its projected GDP growth for 2024 to 2.5%, year-over-year, from a 2.0% rate in September, while moving its 2025 projection slightly higher, from 2.0% to 2.1%. The Fed kept the projection for 2026 at 2.0% and lowered the projection for 2027 to 1.9% from 2.0%.
The SEP also lowered the rate of unemployment for 2024, from 4.4% in September to 4.2% while lowering the 2025 rate of unemployment from 4.4% to 4.3%.
The next FOMC meeting takes place January 28-29, 2025.
All expressions of opinion reflect the judgment of the Raymond James Chief Investment Officer and the Raymond James Chief Economist and are subject to change.
There is no assurance the trends mentioned will continue or that the forecasts discussed will be realized. Past performance may not be indicative of future results. The Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks. An investment cannot be made in this index. Economic and market conditions are subject to change. Investing involves risk, and you may incur a profit or loss regardless of the strategy selected.
