Fed cuts, signals limited rate reductions to come in 2025

The Federal Reserve cut its policy rate by 25 basis points to a range of 4.25% to 4.5% at its December meeting, as was universally expected. However, the market isn’t loving all that it’s hearing from the US central bank.

Their summary of economic projections accompanying this decision showed that the median policymaker expects just 50 basis points in further rate reductions in 2025. The statement had scant changes, only adding that the central bank would be “considering the extent and timing of additional adjustments” to its policy rate, which is tantamount to a warning that it isn’t currently leaning toward lowering rates at its upcoming meeting, something it’s done at the prior two meetings as well. One voting member — Beth Hammack, Cleveland Fed chief — also dissented, preferring that the central bank make no change to its policy rate at this meeting.

The SPDR S&P 500 Trust swung from a gain of 0.2% to a drop of as much as 0.6%, and the Invesco QQQ Trust went from treading water to down 0.9%. The reversal in small caps was much more stark, with the iShares Russell 2000 ETF going from up 0.8% to down 0.9%.

Treasury yields are on the rise, and Bloomberg Dollar Spot Index is also spiking, up about 0.6% to its highest level since November 2022.

Neil Dutta, head of US economics at Renaissance Macro Research, said the silver lining is that the central bank’s projections also imply a lower bar to additional easing should the unemployment rate climb or inflation decelerate by more than they anticipate.

“The unemployment rate is already more or less at the Fed’s forecast and the outlook for unemployment is higher for reasons we have argued,” he wrote. “The Fed raised the inflation forecast and I think there is plenty of downside risk to that forecast. Shelter is slowing and so is wage inflation.”