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.
Summary of FOMC Meeting on December 18, 2024
The Federal Open Market Committee and the Board of Governors met at the Board of Governors’ offices on December 17 and 18, 2024.
Treasury yields have risen slightly since November, with a notable increase since mid-September driven by real yields. Post-election, market liquidity worsened but stayed within the recent three-year range. Near-term inflation compensation measures rose a bit, but long-term measures remained stable, indicating no major inflation concerns. Equity prices maintained their gains post-election.
Future rate cuts are anticipated to slow down in 2025, with a total of 75 basis points expected for the year, though there is significant uncertainty around this.
The end of balance sheet runoff is now estimated to be in June 2025, based on revised estimates from respondents.
Most advanced economies are expected to cut policy rates in 2025, unlike the U.S., which could strengthen the trade-weighted U.S. dollar.
Overnight rates stayed stable with minor pressures around month-end and auction dates. Repo markets are expected to see upward pressure at year-end, with proactive measures being taken. The supply of reserves remained abundant and pricing was insensitive. A potential debt limit reinstatement in 2025 could pose challenges for reserve assessment.
Economic Situation and Financial Review
In 2024, the economy grew steadily, with real GDP expanding solidly. Labor market conditions eased, but unemployment remained low. Inflation was lower than the previous year but still high. PCE inflation was 2.3% in October, down from 3% a year earlier, while core PCE inflation was 2.8%, down from 3.4%. CPI inflation was 2.7% in November, and core CPI was 3.3%, both lower than the previous year.
Nonfarm payroll gains slowed slightly in October and November, and the unemployment rate rose to 4.2%. Average hourly earnings increased by 4% over the past year.
The third-quarter GDP saw a solid gain, similar to the second quarter. Exports rose briskly, and imports grew even faster. Fourth-quarter indicators suggested continued solid GDP growth.
In the third quarter, growth picked up in the euro area and Mexico but slowed in the fourth quarter. China’s retail sales growth slowed, and domestic demand was weak. Inflation eased in most foreign economies but remained high in services.
The market-implied path of the federal funds rate edged higher since the U.S. election. Treasury yields initially increased but then reversed, ending little changed. Equity prices rose, especially in cyclical sectors. Foreign market pricing reflected weaker data and expected policy easing.
Credit was broadly available for large-to-midsize businesses and municipalities but tighter for small businesses. Household credit was generally available, with little change in auto loans and weak revolving credit growth.
Credit quality remained solid for large-to-midsize firms and home mortgage borrowers.
Fed Staff Economic Outlook
Economic conditions are expected to remain strong, despite uncertainties in trade, immigration, fiscal, and regulatory policies. GDP growth is projected to be slightly slower than previous forecasts, and the unemployment rate is expected to be slightly higher but near its natural rate. Inflation forecasts for 2024 are a bit higher due to recent data but are expected to remain the same in 2025 and decline to 2% by 2027. The uncertainty around these projections is within the historical range of the past 20 years. Risks for employment and GDP growth are balanced, but inflation risks are higher due to core inflation and potential policy changes.
FOMC Views on Current Conditions and Economic Outlook
Inflation has eased from its peak in 2022 but remains somewhat high, with the rate of disinflation slowing in 2024 and some monthly price readings higher than expected. Prices for core goods and market-based services are stable, with firms hesitant to raise prices due to consumer sensitivity. Housing services prices have increased but are slowing down. Inflation is expected to move towards 2%, although recent data and potential policy changes might slow this process. There is elevated uncertainty about trade and immigration policies, leading to varied approaches in participants’ projections.
FOMC Discussions on Economic Conditions and Policy
Recent GDP growth was driven by good supply conditions, so it’s unlikely to cause inflation. Factors putting downward pressure on inflation include weaker business pricing power, tight monetary policy, strong inflation expectations, and lower wage growth. The labor market is balanced, with recent productivity gains and wage growth slightly above the rate consistent with 2% inflation.
Labor demand indicators show gradual easing, with no signs of rapid deterioration and low layoffs. The unemployment rate remains low, and labor market conditions are expected to stay solid under proper monetary policy, though there’s significant uncertainty in evaluating trends.
Consumer spending is supported by a strong labor market, rising real wages. Business activity is boosted by favorable supply conditions like increased labor supply, investment, and productivity. Equity markets reflect positive investor sentiment.
The risks to achieving maximum employment and price stability are balanced. However, inflation risks are higher due to stronger-than-expected readings, potential policy changes, global supply disruptions, eased financial conditions, strong household spending, and persistent housing price increases.
Most participants support lowering the federal funds rate by 25 basis points to 4¼ to 4½ percent to support economic and labor market strength and progress on inflation. There’s a need for a careful approach to monetary policy decisions, considering recent high inflation, strong spending, and labor market conditions. Future policy will slow the pace of easing and gradually move towards a neutral stance based on economic data and conditions.
Voting against rate cut: Beth M. Hammack
President Hammack disagreed with lowering the federal funds rate, preferring to keep it at 4½ to 4¾ percent. She cited uneven progress in reducing inflation to 2 percent, the strong economy and labor market, and current financial conditions as her reasons.
