Wall Street's Bet: Fed's Final 2024 Rate Cut and Caution in 2025

As the Federal Reserve (Fed) prepares for its final meeting of the year, Wall Street is betting on a final rate cut in 2024 and a more cautious approach in 2025. The Fed has been battling inflation since March 2022, and while progress has been made, inflation remains above the central bank's 2% target. The Fed's Summary of Economic Projections (SEP) and Chair Jerome Powell's press conferences will be crucial in guiding market expectations for the coming year.

The Fed is expected to lower its benchmark rate by 0.25 percentage points on Wednesday, following two previous cuts this year. This would bring the federal funds rate to a range of 4.25% to 4.5%, down from its current target range of 4.5% to 4.75%. However, expectations for 2025 are more uncertain, with the Fed likely to adopt a wait-and-see approach due to the incoming Trump Administration's proposed policies and lingering inflation concerns.



Market participants are closely watching the Fed's communication and guidance on future rate decisions, particularly regarding 2025. The Fed's SEP and Powell's press conferences are key sources of information. In September, the SEP implied rate cuts in both 2024 and 2025, but recent data has led to a reassessment. The unemployment rate has steadied, and monthly inflation readings have been hotter than expected. As a result, the market now prices in fewer cuts in 2025, with futures indicating just a half percentage point of total easing. Some policymakers have expressed growing support for a pause in interest-rate cuts, suggesting a "hawkish cut" in December. However, the Fed's communication will be crucial in guiding market expectations for 2025. Powell may imply a slower pace of rate decreases ahead, citing uncertainty about the neutral rate of interest. The evolution of economic data will likely guide Fed policy in 2025, rather than a strong pre-conceived notion about the neutral rate.



Geopolitical tensions and global economic conditions significantly influence Wall Street's confidence in a final 2024 rate cut by the Fed. As the Fed aims to balance inflation and economic growth, external factors like geopolitical instability and global economic uncertainty can impact its decision-making. For instance, the Russia-Ukraine conflict and its impact on energy prices, along with supply chain disruptions, can influence inflation expectations and the Fed's rate cut trajectory. Additionally, global economic slowdowns, such as those experienced in Europe and Asia, can affect U.S. economic growth prospects, further influencing the Fed's policy stance. Wall Street's confidence in a final 2024 rate cut may waver as these factors evolve, with investors closely monitoring geopolitical developments and global economic indicators to gauge the Fed's next move.

In conclusion, Wall Street is betting on a final rate cut in 2024 and a more cautious approach in 2025 by the Fed. The Fed's communication and guidance on future rate decisions, particularly regarding 2025, will be crucial in guiding market expectations. Geopolitical tensions and global economic conditions also play a significant role in shaping Wall Street's confidence in the Fed's policy moves. As the Fed approaches the neutral rate, investors should anticipate a more data-dependent and nuanced communication strategy, with the central bank emphasizing the need to monitor economic developments closely and adjust policy accordingly.