Fed Interest Rate Decisions

By Howard Schneider

WASHINGTON (Reuters) – Investors largely anticipate that the U.S. Federal Reserve will reduce interest rates by a quarter of a percentage point during its December 17-18 meeting. Attention will shift toward the officials’ new economic projections accompanying the decision.

These projections are expected to reveal how much further the Fed may lower rates into 2025 and, possibly, 2026. This assessment will need to incorporate data reflecting persistently high inflation, a robust labor market, evolving results from the U.S. election affecting global trade and immigration, alongside ongoing geopolitical tensions.

Given the variety of factors in play, many analysts predict a hawkish tone from the central bank’s policy statement, its chair Jerome Powell’s remarks post-meeting, and the updated projections. The Fed may be nearing a point where it stops cutting rates or is hesitant to lower borrowing costs significantly more than in recent months.

Key Data Points for Consideration

Inflation's Stubborn Dance

Headlines show minimal improvement in inflation since the Fed's prior economic projections in September or its recent meeting in November. Adjustments in components suggest disinflation is progressing. Housing cost increases have slowed, and the Personal Consumption Expenditures Price Index—used by the Fed to track progress toward its 2% inflation goal—may show a low reading next week, two days post-meeting.

Hiring Has Held Up

The job market continues to surprise the central bank positively. Although the unemployment rate has increased slightly to 4.2% since the Fed's aggressive rate hikes began in March 2022, it remains below the national average and near levels indicating full employment. Unless surprise data presents itself in December, the unemployment rate is likely to stay below the 4.4% initially predicted for September.

Despite a deceleration in job creation recently, many policymakers view the labor market as currently sustainable. This strength is among the reasons why future rate cuts must be considered carefully—since the economy appears to be close to its potential. An excessive reduction in the current policy rate of 4.50%-4.75% may stimulate demand, challenge the economy's responses, and lead to inflationary pressure.

Wages Offset by Productivity

Another favorable development in recent data indicates that worker productivity continues to improve over time. This productivity growth has mitigated wage increases that the Fed deems too high. Unit labor costs, crucial for determining whether a tight job market contributes to inflation, have been rising at a more moderate pace as a result.

Demand Doesn't Quit

Consumer spending remains resilient, reverting from pandemic highs to levels more aligned with pre-pandemic trends, showing little sign of cooling. As long as employment and earnings are stable, spending activities will persist—an essential condition in achieving the “soft landing” from elevated inflation that Fed officials believe is within reach.