Summary

As widely expected, the FOMC cut the target range for the federal funds rate by 25 bps at today’s meeting. However, one Committee member, who preferred to keep rates on hold, dissented.

The median dot for 2025 in the so-called “dot plot” was raised by 50 bps. In September, the median FOMC member looked for 100 bps of policy easing next year. The median forecast today looks for only 50 bps of rate cuts next year.

The wide dispersion in the dot plot for next year may reflect some uncertainty regarding the policy agenda that the incoming administration may pursue. Notably, the range of core PCE inflation forecasts for 2025 widened considerably.

Fed Cuts Rates but Forward Guidance Is Hawkish

As widely expected by market participants, the Federal Open Market Committee (FOMC) reduced its target range for the federal funds rate by 25 bps at its policy meeting today (Figure 1). The FOMC has now cut its target range by 100 bps from its peak of 5.25%-5.50% through moves of 50 bps in September, 25 bps in November and 25 bps today. Although the Committee eased policy today, we would characterize the decision as a “hawkish” rate cut.

For starters, Beth Hammack, the president of the Federal Reserve Bank of Cleveland, dissented today, voting to keep rates on hold instead. In that regard, Chair Powell noted in his post-meeting press conference that today was a “closer call” to cut rates by 25 bps than it was in November. Secondly, the Committee made a notable change to its post-meeting statement. The statement that was released following the last FOMC meeting on November 7 contained the following clause: “In considering additional adjustments to the target range for the federal funds rate…” This clause implied that the FOMC thought last month that it would continue to ease policy in coming months. That clause was changed to the following in today’s statement: “In considering the extent and timing (emphasis ours) of additional adjustments to the target range for the federal funds rate…” This rewording of the clause implies to us that the FOMC may now pause in the next meeting or two to ascertain how much additional policy easing may be appropriate.

The FOMC also released its quarterly Summary of Economic Projections (SEP) today. As we projected in our recent Flashlight report, the median forecast for real GDP growth in 2025 was revised a touch higher, the unemployment rate forecast for the end of next year edged down from 4.4% in the September SEP to 4.3% in today’s projections, while the core PCE inflation rate for 2025 was pushed up from 2.2% to 2.5%. Accordingly, the median dot in the so-called “dot plot” rose by 50 bps for 2025 (Figure 2). In September, the median FOMC member thought that a target range for the federal funds rate of 3.25%-3.50% would be appropriate at the end of 2025. The median FOMC member today now thinks that a range of 3.75%-4.00% will be appropriate. In other words, the median member now thinks that only 50 bps of additional easing next year will be warranted if conditions evolve as expected.

That said, the dots for next year are widely dispersed. The most dovish Committee member thinks that 125 bps of additional easing would be appropriate next year, while the most hawkish member sees no additional rate cuts from today’s level. This dispersion may reflect uncertainty surrounding the policy agenda that the incoming Trump administration may pursue in 2025. Notably, the range of forecasts among FOMC members for core PCE inflation, which the Fed believes is the best measure of the underlying rate of consumer price inflation, widened meaningfully for next year between September and December. The range for 2025 core PCE inflation in the September projection was 2.1% to 2.5%. The range in today’s SEP widened to 2.1% to 3.2%. Some FOMC members may be assuming that tariff hikes, should they go into effect, will raise inflation next year. (See the report we wrote in July for further discussion of the macroeconomic effects of tariffs.)

In sum, today’s FOMC meeting leads us to believe that, barring some dramatic unexpected development, the Committee likely will keep rates on hold at its next meeting on January 29. However, we believe the FOMC will continue to ease policy next year, albeit at a slower pace than over the past few months. Chair Powell seemed to support this expectation when he noted in his presser that the stance of monetary policy is “significantly closer to neutral” than it was previously, but that policy is “still meaningfully restrictive.”