Fed on track for 25 basis point rate cut to close out 2024 policy moves

Onome Amuge

As the Federal Reserve, led by Chairman Jerome Powell, braces for its highly-anticipated final policy decision of the year  on the last trading day of 2024, Michael Brown, senior research strategist at Pepperstone, believes that a 25 basis point rate cut is virtually assured.

This is as unemployment figures have climbed unexpectedly to 4.2 percent in November and inflation maintaining its steady pace at 2.7 percent and 3.3 percent for headline and core CPI, respectively.

According to Brown, the Fed’s long-standing preference for maintaining market stability is likely to override any data-driven concerns in its upcoming rate decision. 

In a note to Business a.m., Brown highlighted that the Federal Open Market Committee (FOMC) has traditionally been reluctant to upset the market’s expectations, and with the USD OIS curve suggesting a 95 percent probability of a 25 basis point cut, the Fed is likely to follow through with that expectation, regardless of any countervailing economic data

“Such a cut, though, is likely to be a ‘hawkish’ one, as Powell attempts to build greater optionality into the FOMC’s policymaking in 2025, amid increasing upside inflation risks, with the labour market still tight, and with potential trade tariffs set to be imposed once President-elect Trump takes office. 

“Hence, we are again unlikely to see any firm pre-commitments as to the future path that the fed funds rate will take, with Powell instead likely to repeat that data will guide the FOMC in terms of the speed at which rates return to neutral, and that the FOMC can be “cautious” in finding said neutral rate, while also being able to slow the pace of easing were data to permit them,” he stated. 

In addition to the rate cut, Brown also expects that the Fed’s December dot plot—which represents individual committee members’ expectations for the future path of the federal funds rate—will present a more hawkish outlook than that presented in September. 

The senior research strategist believes that the December dot plot’s median estimate for the fed funds rate will be revised upward by 25 basis points, reflecting a more aggressive approach to tightening. Moreover, the spread of 2025 dots is anticipated to narrow significantly, as the perceived risks to the Fed’s dual mandate of maximum employment and stable inflation abate.

As Fed Day takes center stage, Brown emphasised that today’s events present several other notable developments. 

In the UK, inflation figures for the month of November are likely to reveal a 0.3 percentage point rise in both the headline and core prints, reflecting a steady uptick in consumer prices, with headline inflation at 2.6 percent and core inflation at 3.6 percent year-over-year.