Investors remain confident that the Federal Reserve (Fed) will implement a 25 basis point interest rate cut at its policy meeting scheduled for December 17-18.
This expectation was further reinforced after economic data reports showed that inflation readings for November rose 0.3% for the fourth consecutive month, in line with forecasts. On an annualized basis, inflation rose by 3.3%, adding to pressure on FED policymakers.
December Rate Cut Expectations Market
The latest inflation data further reinforced market confidence in a rate cut, with the probability jumping to 90% after the data release.
While the consensus is clear, concerns are growing that the Fed's efforts to achieve its 2% inflation target may have stalled.
At the upcoming FOMC meeting, the FED is also expected to release its latest rate forecasts and projections along with its decision. While the market is preparing for a December cut, the outlook for 2024 remains unclear.
The current price of the rate implies expectations of two to three more rate cuts next year, reflecting investor concerns that the economy may need continued monetary easing to address potential challenges.
A Balancing Challenge for Policymakers
Persistent inflationary pressures pose a significant challenge for Fed officials. While a rate cut next week is almost certain, the path forward is expected to be fraught with complexity.
Policymakers face the dual risk of tightening policy too much, which could hurt the labor market, or easing too aggressively, which could reignite inflationary pressures.
Some Fed members remain cautious, especially as core inflation readings remain strong.
The readings may raise concerns among members of the Federal Open Market Committee (FOMC) that the disinflationary momentum has stalled.
The dynamics highlight the potential for divergences in views as the central bank navigates a challenging economic landscape in the year ahead.
With November's core inflation data underscoring the Fed's difficulty in meeting its target, the Fed's December meeting will be the key to monetary policy for 2025.
Investors will be paying close attention to the latest economic projections and any signals about the central bank's willingness to continue cutting rates into the new year.
