Fed Day- What will move markets

The Federal Reserve is expected to announce a 25 basis point rate cut today, bringing the Fed Funds rate to a range of 4.25%-4.50%. This marks the second consecutive rate reduction and reflects a measured easing strategy amidst easing inflationary pressures and softening labor market conditions. However, the focus will be on the Fed’s forward guidance for 2025, particularly through updates to the Summary of Economic Projections (SEP) and the dot plot, which could significantly influence market sentiment.

The 2025 Dot Plot: A Key Focus

The market anticipates adjustments to the 2025 dot plot, potentially signaling a baseline of three rate cuts, down from four in the September projections. If the dot plot points to just two cuts, it would underscore the Fed’s caution, reinforcing the narrative of a "hawkish cut." Similarly, projections for 2026 could shift to reflect fewer cuts, aligning with a slower normalization of rates amid persistent inflation risks. Investors will also scrutinize the terminal rate projections, with some speculation that the long-run neutral rate could edge up to 3% from the previous 2.875%, reflecting a structurally higher rate environment.

Economic Projections: Inflation, Growth, and Jobs

The Fed’s updated projections for core PCE inflation, GDP, and unemployment will provide crucial insights into its economic outlook. Core PCE inflation is expected to be revised higher for 2025, signaling caution about achieving the 2% inflation target. GDP growth for 2025 could also be raised, reflecting resilience in economic activity, while unemployment forecasts may be adjusted slightly lower given recent labor market data. For 2026, the GDP projection will be closely watched, as it could highlight the Fed's perspective on medium-term economic momentum amidst evolving fiscal and trade policies.

Powell's Press Conference: Risk Balancing

Fed Chair Jerome Powell’s remarks will be pivotal, particularly his assessment of risks between inflation and job market weakness. Powell is expected to emphasize flexibility and patience in policy adjustments, highlighting that monetary policy remains restrictive. Markets will be keenly attuned to whether Powell leans dovish, suggesting readiness to cut rates further if economic conditions warrant, or adopts a more cautious tone, prioritizing inflation risks over labor market concerns.

Market Expectations for Rate Cuts

Currently, Fed Funds futures are pricing in two additional rate cuts in 2025, likely at the March and July or September meetings. This aligns with a year-end rate of approximately 3.84%. A median dot plot projection matching this pricing would reassure markets, but any indication of fewer cuts—particularly only one in 2025—could be perceived as a hawkish surprise, sparking volatility across asset classes.

Potential Market Implications

Equities, particularly growth-sensitive sectors, could face pressure if the Fed signals a slower pace of easing. A hawkish dot plot or Powell’s cautious tone might weigh on valuations, while defensive sectors like utilities and consumer staples may attract interest. Fixed income markets could see a bear flattening of the yield curve, with short-term yields rising if fewer cuts are projected. Meanwhile, the dollar could strengthen as rate expectations adjust, although potential fiscal and trade policy developments under the incoming administration may introduce additional currency volatility.

Economic and Fiscal Uncertainty

The Fed’s projections will be shaped by ongoing uncertainties, including sticky inflation components and the fiscal and trade priorities of the new administration. Powell may signal a pause in January 2025 as the Fed assesses the economic impact of potential trade tariffs or other policy changes. The Fed’s flexibility to adapt to these dynamics will be central to market interpretation of today’s guidance.

Conclusion

The Fed decision will provide critical insights into the trajectory of monetary policy in 2025 and beyond. While a 25 basis point rate cut is widely expected, the updated dot plot and Powell’s comments on inflation and labor market risks will shape the market’s outlook. With projections for slower rate normalization and cautious rhetoric likely, today’s decision could solidify expectations of a measured easing path while reinforcing the Fed's commitment to balancing inflation and growth risks in a dynamic economic environment.