The Federal Open Market Committee (FOMC) is a branch of the Federal Reserve System responsible for overseeing the nation’s open market operations. This includes making key decisions about interest rates and the growth of the United States money supply. The FOMC meets several times a year to discuss and set monetary policy, aiming to achieve maximum employment, stable prices, and moderate long-term interest rates.
FOMC Meeting on December 18, 2024
The Federal Open Market Committee (FOMC) decided to cut the federal funds rate by 0.25 percentage points, bringing it to a range of 4.25%-4.5%. This marks the third consecutive rate cut this year. The Fed has indicated a more cautious approach for 2025. Projections suggest there will be fewer rate cuts due to ongoing inflation concerns. Additionally, potential economic policies from the new administration are influencing these projections.
Economic Projection
The Federal Reserve released its latest economic projections today, December 18, 2024. Here are some key projections at median level.
- GDP Growth: The Fed projects real GDP growth of 2.1% for 2025. Unemployment Rate: The unemployment rate is expected to be 4.3% for 2025.
- Interest Rates: The federal funds rate is projected to be 3.9% for 2025
- Inflation (PCE): The Fed anticipates PCE inflation of 2.5% for 2025.
These projections reflect the Fed’s cautious approach to balancing economic growth and inflation
Source: Federal Reserve
Fed Chair Powell Press Conference
Fed Chair Jerome Powell delivered several key points in his press conference today. He announced a 0.25% rate cut, bringing the federal funds rate to a range of 4.25% to 4.5%.
Also, Powell emphasized that the Fed will adopt a more cautious approach in 2025, with projections suggesting only two more rate cuts next year.
Additionally, Powell highlighted that the economic outlook is uncertain, and the Fed will closely monitor incoming data. The labor market has eased, with the unemployment rate rising slightly but still remaining low.
Powell mentioned that from here on, they plan to move slowly and carefully to keep an eye on inflation.
Fed Chair Jerome Powell highlighting progress in inflation and the labor market. Despite recent cuts, inflation remains above the target, and unemployment has increased slightly but is still low.
Impact of Rate Cut on Markets
This year, the Federal Reserve cut interest rates three times, totaling 100 basis points. Fed Chair Jerome Powell said they’re now taking a cautious approach for 2025 as rates get closer to a neutral level for the economy.
The Fed’s new projections show only two more 0.25% cuts in 2025, down from four expected in September. This change reflects a less strict policy, with rates expected to be 3.9% by the end of next year and 3.4% by the end of 2026.
Despite making progress, inflation is still an issue, with expectations of 2.5% in 2025. Powell is confident that they will achieve the 2% target, though it might take a year or two. The labor market is gradually cooling, with an unemployment rate of 4.2%, and Powell isn’t worried about major downside risks.
After the announcement, the Dow dropped over 1,100 points (2.5%), the S&P 500 fell 2.9%, and the Nasdaq decreased by 3.5%.
The sharp drop in the stock market after the Fed’s announcement can be explained by the Fed’s plan for only two more rate cuts in 2025, instead of the four previously expected. This worried investors about higher borrowing costs for a longer time.
Also, the Fed’s statement that inflation is still a bit high raised concerns about its effects on business profits and consumer spending.
Additionally, the Fed’s cautious attitude and focus on ongoing inflation risks created uncertainty about the economic outlook, leading investors to sell off assets. These factors together caused a significant decline in the Dow, S&P 500, and Nasdaq.
