Fed Meeting: Should Jerome Powell Cut Rates For Third Time In Row, Or Pause? Key Factors To Impact Decision

Fed Rates: All eyes are now on the US Federal Reserve which will announce the last monetary policy of 2024 on December 18th. The majority of consensus is that the Jerome Powell-led committee is most likely going to cut rates by 25 bps, however, the bigger concern is the trajectory of lowering rates in 2025 which looks bleak owing to inflationary pressures and Trump 2.0. As per experts, one of the key factors to watch out for on Wednesday is whether the Fed would lean towards pausing rate cuts from January 2025.

As per financial services provider, ING, FOMC will deliver a 25bp cut from Wednesday's meeting. While there are arguments for the Fed to pause (inflation hiccups plus Trump policy intentions), this Fed has consistently delivered on the market discount. And where it does not like the discount, it has managed to telegraph it to the markets ahead of time. Nothing like that has happened, so expect delivery of a 25bp cut.

Fed's policy rates decision will take into a host of factors such as labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Coming to the elephant in the room, US CPI inflation shot up for the second consecutive month to 2.7% in November 2024. While the country's producer prices data rose to 3% in November, making the biggest surge since February 2023.

Additionally, the US employment rate dipped to 59.80% in November, compared to 60% in the previous month. Alongside, the country's unemployment rate has also surged to 4.2% in November 2024. Meanwhile, the country's GDP growth was slow to 2.8% in Q3 of 2024, compared to 3% in the previous quarter.

Should the Fed Cut Rates On December 18?

Matt Weller CFA, CMT, Head of Market Research in a note at City Index said, that one big uncertainty for Jerome Powell and the company is the potential changes that Donald Trump's second term will bring. Specifically, the potential for expansionary fiscal policy from an extension of the tax cuts, easier regulation, protectionist trade policy, and reduced immigration could all impact inflation and the jobs market, and by extension, Fed policy in the years to come.

He added, at the margin, this uncertainty may push the committee to be more cautious with future decisions until the proverbial "lay of the land" is better understood, and it could lead to a slower reduction in interest rates to avoid a potential acceleration of inflation.

"The Federal Reserve is likely to cut the federal funds rate by 25 basis points (bps) to 4.25-4.50% at next week's Federal Open Market Committee (FOMC) meeting. However, the vote may not be unanimous given diverging perspectives around the degree of restrictiveness of monetary policy and how much more recalibration is needed to return policy to a neutral stance," Gregory Daco, EY-Parthenon Chief Economist, Strategy and Transactions, Ernst & Young LLP.

Daco believes Fed Chair Jerome Powell will promote a forward-looking risk management approach. He will likely argue that the FOMC should ease policy in December and move "more gradually" toward a neutral policy stance in 2025.

Is there a possibility of a pause?

Bankrate quoted KPMG Economist Yelena Maleyev's team which stated that the odds of a rate cut in December are closer to a coin flip. Maleyev points to how the U.S. economy expanded at a 2.8 per cent pace in the third quarter of 2024, powered by robust consumer spending. Employers added more than 200,000 jobs last month, enough to keep up with population growth.

Maleyev added, "Put all of that together, and it looks like a pretty healthy economy that doesn't necessarily need cuts."

Additionally, Greg Mcbride, CFA, Bankrate's Chief Financial Analyst said, "With a December rate cut, that puts them at 100 basis points of moves since September. At that point, they've got some mileage behind them, and they leave themselves the option of pausing in January."

A somewhat similar outlook is also of ING. The Dutch multinational bank believes the key element the market will be looking for is any indication that the Fed has a tendency to pause on the rate cutting at the January FOMC meeting.

ING's note added, "We think they will; pause that is. It's unlikely they telegraph that intention explicitly. If they did it would be quite a big deal. More likely they point to a more balanced set of risks, and choose to keep their options open."

With inflation remaining sticky, and President-elect Trump looking to strengthen the US growth performance, the Fed is set to signal a more cautious policy easing profile for 2025, ING's note added.

What to watch out for from FOMC? As per ING, keep an eye on their new economic forecasts though with President-elect Trump's policy thrust of immigration controls, tariffs and personal and corporate tax cuts likely to mean the Fed signals a shallower, slower path of easing through 2025.

Fed has cut rates twice in the past two back-to-back monetary policies. The first rate cut which came in after nearly four years, was in September 2024 when FOMC went aggressive with a 50 bps cut. This followed a 25 bps cut in November policy. So far, the Fed has trimmed key fund rates by 75 bps, taking it to 4-1/2 to 4-3/4 per cent.

The rate decision aims to achieve maximum employment and inflation at the rate of 2 per cent over the longer run.

If the Fed cuts rates by another 25 bps, then the total rates cut in 2024 would become 100 bps.

The FOMC committee has members like Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Michael S. Barr; Raphael W. Bostic; Michelle W. Bowman; Lisa D. Cook; Mary C. Daly; Beth M. Hammack; Philip N. Jefferson; Adriana D. Kugler; and Christopher J. Waller.