The US Federal Reserve began its deliberations for the latest monetary policy decisions today, December 17, and will announce its new benchmark interest rate decision on Wednesday, December 18. The US central bank will conduct its two-day Federal Open Market Committee (FOMC) meeting amid analysts’ expectations of another quarter-point rate cut for the second straight time.
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Wall Street analysts widely expect the US Fed chair Jerome Powell-led rate-setting panel to reduce the benchmark policy rate again after delivering its first rate cut since 2020 in September 2024. The new US federal fund rate currently sits at 4.50 per cent—4.75 per cent after the central bank slashed its benchmark rate by 25 basis points (bps) during the November policy verdict.
“Widespread pessimism prevails across all sectors ahead of key policy decisions from the US Fed, BoJ, and BoE. While the market has already factored in a 25 bps cut from the US Fed, it remains vigilant for any hawkish signals,” said Vinod Nair, Head of Research, Geojit Financial Services. Bank of England (BoE) and Bank of Japan (BoJ) will also unveil interest rate decisions this week.
US Fed rate cut trend
In September, the US Fed kicked off its monetary policy easing cycle and voted 11 to 1 to lower the federal funds rate after holding it at over a two-decade high for over a year. It was the US Fed’s first rate cut after four years. The US Fed maintained the key borrowing rate elevated at a 23-year high for 14 consecutive months since July 2023 to combat the worst inflation outbreak in almost 40 years.
In September’s meeting, US Fed policymakers said they see the interest rate falling by another 50 bps by the end of this year, another full percentage point in 2025, and a final half-point reduction in 2026 to end in a 2.75 per cent-3.00 per cent range. One bps equals one hundredth (1/100) of a percentage point.
In November, the FOMC slashed its benchmark interest rate by (25 bps) a quarter of a percentage point, for the second straight meeting after reducing the policy rate in September 2024. US Fed Chairman Jerome Powell has repeatedly said that the central bank does not need to rush to cut interest rates due to the ongoing economic growth, a solid job market, and US inflation that still hovers above the Fed’s two per cent target.
The US Fed hiked rates by 5.25 percentage points between March 2022 and July 2023 to tame inflation. These hikes helped lower inflation from 9.1 per cent in June 2022 to 2.5 per cent. However, high rates have made borrowing costlier for businesses and households. Economists say policymakers must keep rates high enough to defeat rising inflation without derailing the economy.
US Fed Meeting kicks off today: Here are 5 key indicators to watch
1. US Inflation
US inflation accelerated for a second straight month in November 2024, reporting the steepest gain in the last seven months amid higher food prices and other sectors. US consumer price index (CPI) rose to 2.7 per cent last month from a year ago, up slightly from 2.6 per cent in October.
The rise was said to be in line with economists’ expectations. Progress in lowering inflation toward the US central bank’s two per cent target has virtually stalled, with the Bureau of Labor Statistics report showing no improvement in the measure of underlying price pressures over the past four months.
In October, US CPI rose 2.6 per cent from a year earlier, up from 2.4 per cent in September, marking the first rise in annual inflation in seven months or the first acceleration on an annual basis since March. The latest inflation upticks have led some Wall Street experts to believe that the US Fed will go for fewer rate cuts in 2025 or even pause-and-cut to fulfil its dual mandate.
2. US GDP
The US economy expanded at a healthy 2.8 per cent annual pace from July through September 2024 on strong consumer spending and a surge in exports. According to the ‘advance estimate’ from the Commerce Ministry’s Bureau of Economic Analysis (BEA), down from three per cent in Q2.
The slowdown was driven by a decline in private inventory and residential fixed investment, though stronger exports, consumer spending, and federal government spending partially offset it. Imports also saw an uptick.
US gross domestic product (GDP) — the economy’s output of goods and services — slowed from the April-July rate of three per cent. However, the GDP report still showed that the world’s largest economy is durable. Growth topped two per cent for eight of the last nine quarters.
3. US job market
US job growth surged in November 2024 after being severely hindered by hurricanes and strikes. Still, the unemployment rate’s rise to 4.2 per cent pointed to an easing labour market that should allow the US Federal Reserve to cut interest rates again. The labour market’s resilience drives the economy through strong consumer spending.
The Labor Department report showed a solid wage growth last month. The economy created 56,000 more jobs in September and October than previously estimated. According to the data, nonfarm payrolls increased by 227,000 jobs last month after an upwardly revised 36,000 increase in October. Job growth averaged 173,000 per month over the past three months.
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4. US jobless claims
According to Labour Department data, the number of Americans filing new applications for jobless benefits unexpectedly rose last week. Compared to the beginning of the year, more people continued to collect unemployment checks at the end of November as demand for labour cooled.
The initial claims for state unemployment benefits increased by 17,000 to an adjusted 242,000 for the week ended December 7. Though job growth accelerated in November after being severely constrained by strikes and hurricanes in October, the unemployment rate ticked up to 4.2 per cent after holding at 4.1 per cent for two consecutive months.
According to analysts, an easing labour market makes it more likely that the US Federal Reserve will cut interest rates for the third time since embarking on its policy easing cycle in September, despite little progress in lowering inflation to its two per cent target in recent months.
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5. Market Trends
The S&P 500 remains near all-time highs as markets await the Federal Reserve’s December 18 meeting, where a 25-basis-point rate cut is widely anticipated. The Fed’s decision and Powell’s tone will impact US equities, bonds, and the US dollar. A dovish outlook could push the S&P 500 higher, while a hawkish stance may trigger a pullback.
Similarly, inflation risks or fewer rate cuts could strengthen the US dollar. For India, the US dollar index plays a crucial role. A dovish Fed, signalling lower US rates, tends to boost Indian equities, particularly in financials, real estate, and mid-caps, as foreign institutional investors (FIIs) seek higher returns.
“Conversely, a hawkish US Fed may strengthen the US dollar, leading to capital outflows, pressure on the Indian Rupee against the greenback, and the NSE Nifty 50 index correction. However, Indian IT sectors could benefit due to their global exposure to a stronger US dollar,”.
Copper Outlook
Expectation from US Fed Meeting Today:
The US Fed’s updated Summary of Economic Projections (SEP) will be pivotal, especially the dot plot. Due to economic strength and inflation risks, markets now anticipate only two rate cuts in 2025, down from four earlier. Any deviation in the US Fed’s rate projections could significantly influence market sentiment.
The key focus areas include US Fed Chair Jerome Powell’s commentary on inflation, labour markets, and growth, which will shape expectations for 2025 monetary policy. Recent economic data highlights US resilience, with unemployment steady at 4.2 per cent, Q3 GDP growth finalized at 2.8 per cent, and inflation rising to 2.7 per cent. Retail sales rebounded sharply in November, signalling strong consumer spending.
Where To Watch FOMC Meet Live Stream?
You can catch live updates right here on Livemint.
Livestreams will also be available on the Fed website and the Fed’s official YouTube channel.
