At 1:00 pm CST on December 18, the Federal Reserve announced the Federal Open Market Committee (FOMC) had decided to cut the target overnight rate by 25 basis points (0.25%). This will take the upper band of the range from 4.75% to 4.50%. This was as expected.
What wasn’t expected was the committee’s unified opinion that it will likely only reduce the overnight rate by an additional 50 basis points (0.50%) in 2025.
- That would take the overnight target to 4.00%.
Previously, many investors thought the Fed might be more aggressive in cutting rates in the upcoming year.
Simply put, inflation does not appear to be in a hurry to get to the Fed’s desired 2.00% target. In the official statement, members of the FOMC are currently of the opinion inflation will likely hover around 2.50%, or thereabouts, over the next 12-months. Regardless, five of the 19 members on the committee believe the Fed will cut the overnight rate by 75 basis points or greater in 2025.
Then, at approximately 1:30 pm CST, Fed Chairman Jerome Powell addressed the media with prepared remarks (which you can find here) and a Q&A session. I will cut to the quick and say he didn’t allay any frayed nerves with his comments. The reason being is that he seemed as uncertain about the future of inflation as the markets are. Let’s just say there were a fair amount of proverbial “on the one hand, but, then again on the other” comments during the Q&A which the markets did NOT like in the slightest. You can watch the press conference in its entirety here if you would like.
Data Dependency
It is important to note the implication is that everything will be “data dependent” moving forward. That means should inflation, economy and/or labor markets cool more than the Fed current thinks they will, it reserves the right to do whatever it wants to do. You can think of the phrase “data dependent” as an escape valve or “get out of jail free” card.
A lot can change between now and the end of 2025. Shoot, a lot can change between now and the end of the 1st quarter of next year. Unless something unforeseen happens, you can reasonably expect the economic data to be slightly softer at the start of the new year, which could alter the Fed’s position/behavior. As I wrote above, everything from this point is likely “data dependent.”
The Bottom Line
What it all means in layman’s terms:
- The Fed cut the overnight rate from 4.75% to 4.50%.
- Inflation expectations are not as low as the Fed would like, being 2.50% instead of 2.00%.
- The Fed is currently telegraphing two more 25 basis point rate cuts by the end of 2025.
- This will take the overnight rate to 4.00%.
- The economy will likely slow in 2025 from 2024’s pace, but should still grow.
- The Fed is currently expected to continue “easing” (cutting rates) through the end of 2026…eventually taking the overnight rate to 3.25-3.50%.
- The over/under line for the Fed in 2025 is 4.00%
- The smart best if you have to choose? The under.
I hope this helps.
Thanks
John Norris
Chief Economist
Please note, nothing in this correspondence should be considered or otherwise construed as an offer to buy or sell investment services or securities of any type. Any individual action you might take from reading this newsletter is at your own risk. My opinion, as well as those of our Investment Committee, is subject to change without notice. Finally, the opinions expressed herein are not necessarily those of the rest of the associates and/or shareholders of Oakworth Capital Bank or the official position of the company itself.