United States
The FOMC cut the Fed Funds rate by 25bp, taking it to a range of 4.25% to 4.5% with one member dissenting. The central bank nonetheless dialed back its future rate cut projections and revised higher its inflation forecasts.
While we expect the rate cutting cycle to continue in 2025, the Fed may be more cautious as the new administration’s economic agenda crystallizes.
FOMC dials back its rate cut estimations
The FOMC adjusted its median “dot plot” interest rate projections to reflect only two rate cuts in 2025, down from the four it projected in September (Figure 1). Additionally, the median projection of the longer-run “neutral” rate also increased slightly from 2.9% to 3%.
Figure 1: The FOMC projects fewer rate cuts in 2025
Source: Federal Reserve, Bloomberg, Insight, December 2025
The FOMC made no significant changes to its official statement, reiterating that “risks to achieving its employment and inflation goals are roughly in balance”.
The Fed is still watching both sides of its mandate closely
The FOMC updated its quarterly Summary of Economic Projections (SEP), increasing both its headline and core inflation projections for 2025 from 2.1% and 2.2% respectively to 2.5%. Chair Powell attributed this to slower progress in areas like shelter inflation over recent months. He also acknowledged that “some” committee members did start to consider President-elect Trump’s fiscal policy agenda, although he stressed that the impact of potential impact of tariffs remains highly uncertain at this stage. Nonetheless, Powell believes the central bank is “broadly on track” to meet its inflation goals.
Elsewhere, the committee left its medium- and longer-term GDP and inflation projections trending at 2% and 4.3% respectively. Powell stated that the decision to cut rates was a “closer call” than in previous meetings but warned that moving too slowly could “needlessly risk undermining economic activity and the labor market.” Although Powell noted that downside risks to the labor market “have diminished” he mentioned the central bank is keen to keep the labor market roughly “where it is” and “we don’t think we need further labor market cooling to get inflation down to 2%”.
When examining the connection between the demand and the supply of labor using the "Beveridge" curve, it appears we are at a point on the downward-sloping curve where additional labor market moderation will probably require a higher unemployment rate (Figure 2).
Figure 2: The future labor market moderation might mean a higher unemployment rate
Source: Bureau of Labor Statistics, Macrobond, Insight calculations, December 2024
Rate cuts are continuing but expect a more cautious Fed
We expect the Fed will adopt a more cautious stance over 2025 given uncertainty around the incoming administration’s economic policies. Nonetheless, we expect the rate cutting cycle to continue in the near term, and we believe it remains a compelling environment for fixed income markets.
