Federal Reserve Poised for December Rate Cut Amid Robust Economic Performance

The Federal Open Market Committee (FOMC) is widely expected to cut the federal funds rate by 25 basis points during its December meeting, lowering the target range to 4.25–4.5 percent. This anticipated policy adjustment reflects recent macroeconomic developments and signals the Federal Reserve’s evolving approach as the economy outperforms prior projections.

The December decision marks a critical juncture in monetary policy, with Federal Reserve Chair Jerome Powell likely to signal a slower pace of cuts in 2025. Analysts project a pause in January and remain divided on the likelihood of another rate cut at the March meeting.

Economic Context: Outperformance in Growth, Unemployment, and Inflation Metrics

Since the Federal Reserve’s September projections, the U.S. economy has exceeded expectations in multiple areas. Third-quarter real GDP grew at an annualized rate of 2.8 percent, following 3.0 percent growth in the second quarter and 1.6 percent in the first quarter. Current estimates for fourth-quarter GDP stand at 2.6 percent, placing 2024’s annual growth at 2.5 percent—well above the Federal Reserve’s September projection range of 1.9–2.1 percent.

The labor market has remained resilient, with the November unemployment rate at 4.2 percent, below the low end of the FOMC’s September forecast of 4.3–4.4 percent. This strength underscores the economy's ability to sustain growth despite higher borrowing costs over the past year.

Inflation has shown mixed trends. Headline Personal Consumption Expenditures (PCE) inflation increased 2.3 percent year-over-year in October, aligning with the Fed’s September projection range of 2.2–2.4 percent. However, core PCE inflation—excluding volatile food and energy prices—rose 2.8 percent, slightly exceeding the 2.6–2.7 percent forecast range. These figures highlight ongoing inflationary pressures, even as the Federal Reserve moves closer to achieving its 2 percent inflation target.

December Rate Cut: Implications and Projections

A December rate cut would mark a pivot from the Federal Reserve’s earlier hawkish stance, emphasizing its dual mandate of price stability and maximum employment. While inflation remains slightly elevated, the Fed appears confident that a gradual easing cycle can be initiated without reigniting significant inflationary pressures. The updated Summary of Economic Projections, expected alongside the decision, will likely show a more optimistic outlook for growth, employment, and inflation in 2025.

Bank of America anticipates that the Fed’s updated “dot plot” will reflect three additional rate cuts in 2025, alongside a higher estimate for the neutral interest rate—the level at which monetary policy neither stimulates nor restricts economic growth. This signals the Fed’s intent to balance a measured approach to monetary easing with vigilance against inflation risks.

Potential Risks and Market Sentiment

Despite strong economic performance, uncertainties remain. PCE inflation in the fourth quarter could rise due to base effects, potentially complicating the Fed’s inflation narrative. Additionally, robust growth and low unemployment might limit the Fed’s ability to implement additional rate cuts without risking overheating in the economy.

Markets have responded to the prospect of rate cuts with cautious optimism. A reduction in borrowing costs could provide relief to interest-rate-sensitive sectors, including housing and technology. However, with markets pricing in a pause in January, the Fed’s tone during Powell’s post-meeting press conference will be critical in shaping expectations for 2025.

Key Focus Areas for Investors

Investors should pay close attention to the Federal Reserve’s updated economic projections and Powell’s remarks, which will provide clarity on the pace and direction of monetary policy in the coming year. In particular, the balance between maintaining economic growth and containing inflation will guide market sentiment.

The Fed’s decision will also have broader implications for bond yields, equity markets, and the U.S. dollar. Should Powell signal a more aggressive easing trajectory, interest-rate-sensitive sectors could see renewed momentum. Conversely, a cautious outlook could temper expectations, leading to increased market volatility.

Conclusion

As the Federal Reserve prepares for its December meeting, the anticipated 25-basis-point rate cut underscores its confidence in the economy’s resilience. While challenges remain, including the need to navigate persistent inflationary pressures, the decision represents a critical step toward aligning monetary policy with evolving economic realities. For investors and policymakers alike, the coming months will test the delicate balance between fostering growth and ensuring long-term stability.