A December rate cut looks to be on the way – but expectations of multiple reductions next year are fading amid a resilient labor market and stubborn inflation
The Federal Reserve meets for the final time in 2024 this week, with market expectations still weighed in favor of a 25-basis-point cut – but more attention than usual will be focused on chair Jerome Powell’s comments after its decision for a clue into how the central bank is approaching the year ahead.
While a recent rise in inflation and resilient labor market growth have seemingly failed to dampen prospects of a cut to round out the year, speculation has risen in recent weeks that the Fed could be ready to scale back on its plans for further reductions in 2025.
The central bank will have its eye on the threat of potentially inflationary tariffs on China, Canada and Mexico by the incoming Trump administration, although federal government policies will likely be less influential in the Fed’s outlook than the jobs market and inflation.
That’s according to Josh Jamner (pictured top), investment strategy analyst at asset management firm ClearBridge Investments, who told Mortgage Professional America a December cut was all but fully priced into markets – but there was a clear chance of fewer 2025 reductions than originally expected.
“As we look out to 2025 our base case would be that there could be two interest rate cuts. I think the possibility that there’s only one more cut seems a little bit more likely than three cuts in 2025, for example,” he said.
“But I think the determinants of that will be less about what’s coming out of DC and more about what labor and inflation data look like.”
How is the Fed currently viewing its 2025 path on interest rates?
Perhaps the most telling indicator of the Fed’s likely approach in 2025 is its so-called dot plot – a visual representation of its Federal Open Market Committee’s (FOMC) interest rate projections, published each quarter.
Following Trump's election win, the proposal to remove Fannie Mae and Freddie Mac from conservatorship has resurfaced, potentially impacting the housing market.https://t.co/kAMYFrDy3y
— Mortgage Professional America Magazine (@MPAMagazineUS) December 16, 2024
The implied neutral rate – the point at which the Fed’s funds rate neither restricts nor boosts the economy – has gone up in a flurry of meetings since last year, Jamner said – “and there’s increasing chatter that the neutral rate could [end up] higher than people believe.”
Still, the prospect of a harder line on immigration under Trump compared with the Biden administration could feed into the labor market outlook, Jamner added, and impact the Fed’s approach to rate cuts.
Mass deportations of undocumented immigrants and a much stricter approach to border security were mainstays of Trump’s election policy platform, with the president-elect having already threatened big tariffs on Canadian and Mexican goods crossing the border unless those countries tighten their own borders.
“As the new administration takes hold and likely further clamps down on immigration, where the pace of job creation ends up will be pretty important for determining what the Fed ultimately does if the job market looks like it’s really weakening,” Jamner said. “I think that would spur the Fed to act.”
How are the labor market and inflation shaping up?
US employers added 227,000 jobs last month, more than expected by analysts, although the jobless rate also inched marginally higher.
The path to three or more rate cuts in 2025 would be a much weaker labor market, according to Jamner, although a recent uptick in inflation will also provide the Fed with food for thought.
A string of hotter consumer price index (CPI) readings in recent months has seen the US inflation rate jump to 2.7%, while core CPI (which excludes food and energy costs) was 3.3% higher in November than the same time last year.
That recent upswing “isn’t anything crazy,” Jamner said, but it could still see the Fed take a more conservative approach on rate cuts than first expected. “Economists aren’t expecting inflation to get to target next year,” he added.
“It’s not that inflation is going back to 5% or 6% based on this [recent increase] or anything like that. We’re kind of hanging in the mid- to upper-twos, which would be a little bit worrying and combining that with strong GDP [gross domestic product] and a healthy enough labor market, I think there will be a group within the Fed that could be arguing, ‘We don’t really need to cut.’”
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