FOMC preview: What’s priced in for the Fed in 2025 is what issues

The market is 96% priced for a quarter-point rate cut from the Federal Reserve today, bringing the Fed funds rate down to a range of 4.25-4.50%, what comes next is far less clear.

The best way to look at 2025 might be a view of the year as a whole, because that’s what the FOMC dot plot will show.

The median dot from the September Fed Summary of Economic Projections was at 3.4%, down from 4.1% in the June forecast. That’s likely to be reversed, at least somewhat.

The Fed funds futures market is priced at 3.84% for year-end 2025, which is almost precisely for two more rate cuts next year. One of those is likely at the March meeting, while the second one is likely in July or Sept.

It wouldn’t be a shock if the Fed median stayed where it is or rose up to match market pricing. If the dots show only one further hike it would be a hawkish surprise that moves markets.

Despite that, expect the FOMC statement and Powell’s press conference to emphasize uncertainty and flexibility. Economic data has improved since September but it’s not a runaway economy and measure of inflation continue to moderate with housing likely to add further downward pressure next year.

What’s highly uncertain is what’s coming on fiscal and trade policy. Due to that, the Fed will want to wait and see at the January 29 FOMC, which is just after inauguration. By the March 19 meeting, they should have a much better handle on the state of the economy and the priorities of the incoming administration.

The challenge for Powell will be communicating patience but I don’t see that as a particularly difficult minefield and — if anything — he’s likely to sound more dovish that expected.

Another spot to watch will be the GDP and unemployment forecasts. This is the set from September:

GDP growth:

• 2024: 2.0%
• 2025: 2.0%
• 2026: 2.0%
• 2027: 2.0%
• Longer run: 1.8%

Unemployment rate:

• 2024: 4.4%
• 2025: 4.2%
• 2026: 4.1%
• 2027: 4.2%
• Longer run: 4.2%

GDP growth is running much closer to 3% while the November unemployment rate was 4.2% Of those numbers ,I’ll be most-keenly watching the 2025 GDP forecast, though it’s subject to the same trade and fiscal caveats.

Overall, I expect the market has over-bought the ‘hawkish cut’ narrative, which is everywhere at the moment. Powell is a dove and is likely to remain one, highlighting flexibility to cut if/when necessary and that policy is still in restrictive territory.