Federal Reserve Rate Cut Announcement

Investing.com — As widely anticipated, the Federal Reserve announced a 25 basis points (bps) rate cut at its December meeting, resulting in a target federal funds rate of 4.25%-4.50%.

However, as noted by Bank of America strategists, this was a “hawkish rate cut” by the Fed. The Federal Open Market Committee (FOMC) statement introduced a nuanced shift in its forward guidance, now mentioning “the extent and timing of additional adjustments”, rather than just “additional adjustments.”

BofA strategists, led by Aditya Bhave, commented that this opens the door to the possibility that the cutting cycle is (nearly) over.

The Summary of Economic Projections (SEP) revealed a median prediction of only two rate cuts in 2025, reflecting a strong consensus among committee members. This decision was influenced by rising inflation concerns, with both headline and core Personal Consumption Expenditures (PCE) inflation forecasts for 2025 adjusted upward to 2.5%.

The Fed's updated macro forecasts indicate increased confidence in the economy. There were slight raises in growth projections, with an expectation for the unemployment rate to decrease. The distribution of risks has shifted towards higher inflation, reflecting the committee's apprehensions about fiscal and trade policies under the Trump administration.

Additionally, the long-run median interest rate expectation was adjusted upward by 12.5 basis points to 3.0%.

During the press conference, Federal Reserve Chair Jerome Powell indicated that a slower pace of rate cuts is now the baseline scenario, pointing to the gradual cooling of the labor market and the downward trajectory of inflation.

He also remarked, “Some people did take a very preliminary step and start to incorporate…highly-conditional estimates of economic effects of policies…”

BofA strategists believe that if tariffs were the main driver of inflation hikes, a softer growth forecast for 2025 would be expected.

“Powell himself does not appear to have accounted for tariffs, given that he cited significant uncertainty about the extent, timing and impact of tariffs,” they added.

BofA maintains its forecast for two additional rate cuts in 2025, but acknowledges that the likelihood has shifted towards fewer or potentially no further reductions.