The Federal Reserve is widely expected to announce a 0.25% rate cut during its policy meeting on December 18, but questions remain about the pace and size of future cuts. With the Fed’s interest rate decision coinciding with a slew of key economic data releases, the outcome could significantly influence markets heading into 2025.

Anticipation Builds Ahead of December Fed Meeting

This week’s Fed announcement is shaping up to be one of the most critical of the year. The Federal Open Market Committee (FOMC) will release its policy decision at 2 p.m. ET on December 18, followed by updated economic projections and a press conference by Fed Chair Jerome Powell at 2:30 p.m. ET.

Market expectations are overwhelmingly in favor of a rate cut:

• CME FedWatch Tool: Shows a 96% probability of a 0.25% rate reduction as of December 15.
• Prestige Economics Forecast: Has been predicting this cut since September.

The projected cut would mark the Fed’s third consecutive reduction, signaling continued efforts to support economic growth as inflation moderates.

FOMC Projections: Key Insights for Markets

The quarterly FOMC projections, released alongside the Fed statement, provide critical insights into policymakers’ expectations for:

• Interest rates (via the dot plot).
• GDP growth.
• PCE inflation.
• Unemployment rates.

In September 2024, the dot plot suggested the federal funds rate would reach 3.4% by the end of 2025 and 2.9% by the end of 2026. These projections also anticipated gradual inflation easing while core inflation remained slightly above the Fed’s 2% target through late 2025.

Analysts are closely watching for any updates to these projections:

• Relatively Unchanged Projections: This scenario is most likely and would likely support equities, bond prices, and commodities while weakening the dollar and bond yields.
• Slower or Fewer Rate Cuts: A less dovish outlook could strengthen the dollar and bond yields while pressuring equities, crude oil, and industrial metals.

Market Reactions to Fed Policy

Markets are poised for significant movement depending on the Fed’s tone and updated projections:

• Equities: Unchanged projections could provide stability, while fewer rate cuts may pressure stock prices.
• Bond Yields and the Dollar: Slower easing could lead to higher bond yields and a stronger dollar.
• Commodities: Crude oil and industrial metals could react positively to continued rate cuts but face headwinds if projections turn hawkish.

The Fed’s outlook on inflation and growth will be pivotal, particularly as markets close out a volatile year marked by geopolitical tensions and macroeconomic uncertainties.

Conclusion: A Pivotal Moment for Markets

The December Fed policy decision carries immense weight as markets seek clarity on the trajectory of interest rates heading into 2025. While a 0.25% rate cut appears almost certain, the updated FOMC projections and Chair Powell’s commentary will determine whether investors brace for a more gradual easing cycle or remain optimistic about continued cuts.

As one of the year’s final major economic announcements, this decision will likely influence equities, bonds, and commodities in the weeks ahead, setting the tone for the start of 2025.