The Case Weakens For Another Fed Rate Cut This Month
By James Picerno | The Milwaukee Company | jpicerno@themilwaukeecompany.com
The case for another rate cut this month is fading, according to TMC Research’s view. US economic growth may be slowing, but only gradually. In fact, some nowcasting models are now anticipating that fourth-quarter GDP will accelerate compared with the strong Q3 rise. Meanwhile, Treasury yields remain near a four-month peak in the wake of the Fed’s ¼-point rate cut last month, a sign that the bond market is no longer screaming for policy easing. Considering all these factors suggests there’s minimal risk for putting rate cuts on pause.
As discussed in the previous update of our Fed funds model (“Fed Should Pause Rate Cuts Until Trump’s Plans Become Clearer,” Nov. 6, 2024), there’s a fair amount of uncertainty surrounding the expected policy changes for the incoming Trump administration. The changes could alter economic conditions in favor of faster growth and/or higher inflation. As a result, there’s a non-zero possibility that the Fed may have to tighten policy at some point next year. Meantime, current data suggests the economy is still expanding at a healthy pace. In fact, the Atlanta Fed’s GDPNow model is now estimating that Q4 GDP growth will accelerate to 3.2%, up from Q3’s strong 2.8% advance.
Another factor that suggests it may be prudent to leave policy unchanged at the Dec. 18 FOMC meeting: the current Fed funds target rate (4.50%-4.75% range) is now close to the optimal target recommended in our Fed funds model, which is roughly 4.2%. That’s less than 50 basis points below the current Fed funds target – a gap that’s narrowed sharply since our Nov. 6 report, when the spread was in excess of 100 basis points below the Fed funds rate.
Fed officials, however, appear set to cut again in two weeks. Christopher Waller, a member of the Fed’s Board of Governors, said on Monday: “At present, I lean toward supporting a cut to the policy rate at our December meeting.”
The Fed funds futures market this afternoon (Wed., Dec. 4) is pricing in a roughly 75% probability that policy will ease again on Dec. 18. Yet the risk for pausing rate cuts appears to be low. The economy is still humming and there’s a possibility that inflation and/or the real economy could heat up in early 2025. Additional stimulus, in other words, isn’t a pressing issue at the moment.
The first Fed meeting in 2025 is scheduled for January 29 – nine days after the new Trump administration assumes command. At that point, the central bank will be in a better position, if only modestly, to assess if more policy easing is warranted or not. By contrast, cutting again in two weeks looks increasingly hasty and, for now, unnecessary.
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