December Fed rate cut: Here's what to expect

A slower path of easing in 2025 could keep homebuyers waiting for lower costs

December Fed rate cut: Here's what to expect

The Federal Reserve is expected to make its third consecutive interest rate cut of 2024 on Wednesday, December 18, in its final policy decision of the year.

Economists widely anticipate a 25-basis point reduction, which would lower the benchmark federal funds rate to a range between 4.25% and 4.50%. If confirmed, this would mark a full percentage point of rate cuts since September.

Despite the anticipated cut, experts caution that a slower pace of easing in 2025 is likely, as stubborn inflation and economic resilience temper the Fed’s ability to provide swift monetary relief.

“The Federal Reserve Open Market Committee (FOMC) is widely expected to cut its benchmark short-term rate by 25 basis points,” said Sam Williamson, senior economist at First American. “Markets are pricing in a 99% chance of this cut, but slowing the pace of rate cuts is appropriate given the recent outperformance of the US economy and stalled progress on bringing down inflation.”

The Fed began aggressively raising rates in March 2022 to combat inflation, pushing borrowing costs to their highest levels in 23 years. While inflation has cooled significantly since then, the latest Consumer Price Index (CPI) for November rose 2.7% year-over-year, still above the Fed’s 2% target.

Experts said this persistent inflation, paired with the continued strength of the US economy, is forcing the Fed to adopt a more measured approach.

Greg McBride, chief financial analyst at Bankrate, believes the December cut could be the last for a while.

“The Federal Reserve is expected to cut interest rates for a third time, by one-quarter of a percentage point, bringing the total rate reduction to one full percentage point since September,” McBride said. “But this could be the last rate cut for a few months, especially with progress on the inflation front stalling out and the economy motoring along.”

Mortgage market impact

The Fed’s cautious approach signals that mortgage costs will remain higher for longer. Mortgage rates, which typically track 10-year Treasury yields, have remained elevated despite the Fed’s rate cuts this year. Since September, mortgage rates have hovered near 7%, dampening affordability for buyers and keeping many existing homeowners locked into their lower rates.

“A more cautious approach of Fed monetary easing will keep borrowing costs higher for longer across the economy,” said Williamson. “This includes mortgage rates, which are benchmarked to the 10-year Treasury yields and are expected to fall to the mid-to-low 6% range by the end of next year.”

With fewer cuts expected in 2025, long-term bond yields are under renewed upward pressure, a trend that has already pushed mortgage rates back to near 7% in recent weeks.

McBride added that mortgage rates are coming down at a far slower pace than they rose.

“Interest rates took the elevator going up in 2022 and 2023 but are taking the stairs coming down,” he explained.

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Treasury yields are expected to hold steady if the Fed delivers a widely anticipated cut. Williamson noted that markets have already priced in a December rate cut and a possible pause in January.

“Treasury yields are expected to remain stable if the Fed acts as anticipated,” Williamson said. “However, if the FOMC projections or Chairman Powell’s statements are more hawkish, yields could rise. Conversely, more dovish projections could cause yields to fall.”

Economic outlook

Alongside the rate decision, the Fed will release its quarterly Summary of Economic Projections (SEP), offering insights into policymakers’ outlook on interest rates, inflation, economic growth, and unemployment in 2025.

The dot plot, which maps the Fed’s rate expectations, is expected to show a slower pace of easing next year, with forecasts pointing to 75–100 basis points of cuts compared to the previous estimate of 100 basis points in September.

“The Fed’s release of quarterly economic projections is sure to get a lot of scrutiny,” said McBride. “Expectations of stubborn inflation amid an otherwise robust economy will boost the likelihood that interest rates stay higher for longer, either through an extended pause in rate cuts or a much slower, more deliberate pace in 2025.”

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