The Federal Open Market Committee will announce its next scheduled decision on interest rates on December 18. Currently an interest rate cut is viewed as slightly more likely than not by the CME’s FedWatch tool which tracks interest rate expectations.
The FOMC is generally on a path to lower rates overall, but the speed of policy easing depends on economic data. FOMC projections from September 18, indicated that interest rates would end 2024 close to their current level of 4.5% to 4.75%. Holding rates steady or a further cut are roughly equally likely due to the dispersion of estimates from individual policymakers.
Recent Federal Reserve Comments
Fed Chair Jerome Powell said that interest rates are likely to decline over time, but the path is uncertain and depends on incoming data.
At a speech in Dallas on November 14 Powell said that: “Inflation is running much closer to our 2 percent longer-run goal, but it is not there yet. We are committed to finishing the job. With labor market conditions in rough balance and inflation expectations well anchored, I expect inflation to continue to come down toward our 2 percent objective, albeit on a sometimes-bumpy path.”
This statement is, to some degree, a response to October’s Consumer Price Index report which saw annual inflation tick up slightly to 2.6%. Since March 2024, CPI inflation had decelerated relatively consistently, so this recent monthly increase, though just a single datapoint, signals that getting inflation all the way to the FOMC’s 2% annual goal may take some time.
Then, regarding monetary policy specifics, Powell said. “We know that reducing policy restraint too quickly could hinder progress on inflation. At the same time, reducing policy restraint too slowly could unduly weaken economic activity and employment. We are moving policy over time to a more neutral setting. But the path for getting there is not preset.”
Markets see this, too, as recent implied forecasts from fixed income markets imply that the FOMC will cut rates in 2025, but not as aggressively as summer forecasts suggested. In part that’s because the jobs market has held up better than expected on recent reports.
The Housing Market’s Impact On Inflation
Perhaps the most significant variable for inflation over the next 12 months will be trends in housing (or shelter costs as the Consumer Price Index report terms it). As a large expenditure category for most households shelter carries a large weight in the CPI series at 37% of the total index. Shelter costs have increased at a 4.9% annual rate to October 2024 according to the CPI report. If shelter costs were to decline, that would likely be sufficient to bring inflation back to the FOMC’s 2% target or lower given the high weight to shelter in the index.
However, shelter costs have so far declined at a slower rate than many forecasts and industry sources expected. For example, rental costs are declining in 2024 according to Apartment List’s October 2024 data Still, the current CPI reading is not inconsistent with trends in home prices. For example, the Redfin home price index is up 5.2% to October 2024 on an annual basis, even if rents might be falling.
What To Expect
It’s likely that the FOMC is on a path towards lower interest rates currently. However, December’s decision on a rate cut hangs in the balance and may depend to some degree in incoming economic data such as November’s CPI report and jobs report.
For now, it seems slightly more likely that the Fed does elect cut rates at their December meeting. If so, this would continue on from cuts in September and November. However, it will be a close decision likely finessed by economic data over the coming weeks.
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