December flashlight for the FOMC blackout period

Summary

• We expect the FOMC will reduce the federal funds rate by 25 bps at the conclusion of its upcoming meeting on December 18 while simultaneously emphasizing that future rate cuts will be slower-going and dependent on incoming data.

• Data over the inter-meeting period suggest ongoing resilience within the U.S. economy. The labor market cooling remains contained while the last few inflation readings show a stubborn pace of price growth that remains about a percentage point above the central bank's 2% target.

• Fed policymakers have hinted that their base case remains a 25 bps cut for December. But, officials have also suggested that current policy is now at a place where further reductions could occur more slowly. Thus, we expect that after lowering the target range by 25 bps to 4.50%-4.75% in December, additional easing is likely to occur at an every-other-meeting pace.

• The quarterly update to the Summary of Economic Projections is likely to underscore the extent to which the U.S. economy has been stronger than expected in recent months. That said, projections for 2025 may be more dispersed than usual given that individual participants might assume different economic policy outcomes, such as higher tariffs, lower taxes or slower growth in the foreign-born labor force.

• We look for the median participant estimate of the fed funds rate at the end of 2025 to rise by 25 bps to 3.625%. However, we would not be shocked to see it increase 50 bps given the recent run of firm data and the possibility of some participants re-centering the risks to their forecasts in light of potential policy changes.

• FOMC participants' estimates of the long-run federal funds rate has been creeping higher over the past year, and we anticipate it will continue to do so with the median long-run dot rising to 3.0%.

• There is a chance that the FOMC will adopt a technical adjustment to the interest rate it pays on overnight repurchase agreements (ON RRPs). If so, then overnight interest rates may fall by a few more bps than the 25 bps decline that typically follows a reduction in the target range by a similar amount. More broadly, a tweak to the ON RRP rate would be yet another sign that quantitative tightening is nearing its conclusion.

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