The chance of a 25 bps interest rate cut at the next FOMC meeting is 98.6%

The CME FedWatch tool came up with a 98.6% chance that the FOMC would recommend a 25 bps interest rate cut at the upcoming two-day December meeting. Chances of a rate cut continue to rise despite November’s high inflation report. 

The CPI (consumer price index) went up in November, rising to 2.7% from October’s 2.6%.  Notably, the rise was in line with estimates from economists polled by LSEG. The rise in CPI moved the headline inflation figure further from the Fed’s targeted 2% rate. Chris Zaccarelli, chief investment officer for Northlight Asset Management, said the increase in inflation would not be enough to spoil Christmas.

Inflation report won’t dim chances of December interest rate cut 

According to CME FedWatch tool a 25 bp rate cut is almost certain next week pic.twitter.com/bMrGwredGv

— Tunc Satiroglu (@kanalfinans) December 12, 2024

According to the CME FedWatch tool, expectations that the Fed will cut interest rates by 25 bps during the next policymakers’ meeting rose from 94.7% to 98.6%, even as inflation edged slightly higher in November.

Zaccarelli claimed that next week’s interest rate cut would enable markets to rally into the end of the year. He added that the Fed is likely to look through these recent month-to-month headline CPI fluctuations to continue on its easing path. 

The Fed began the ongoing rate-cutting cycle with a huge 50 bps cut in September, followed by another 25 bps cut in November.

EY chief economist Gregory Daco and senior economist Lydia Boussour expected the Fed to continue cutting rates despite the latest inflation data. They thought it should be a closer call for the policymakers than the markets indicated.

“We believe economic fundamentals of gently decelerating labor market momentum, strong productivity growth and disinflationary under-currents would support a further 25 bps fed funds rate cut at the upcoming FOMC meeting.”

–Daco and Boussour

Nearly 90% of the economists polled by Reuters expected the 25 bps reduction to bring the federal fund rate down to the 4.25%—4.50% range. However, there was no clear consensus among the polled economists about what the Fed would do beyond the January 2025 FOMC meeting.

Fed chair says the pace of interest rate cuts depends on economic conditions 

Jerome Powell, the Fed chair, said that the U.S. central bank was gradually lowering interest rates and would adjust the pace of rate cuts as needed based on economic conditions. He explained that monetary policy would be adjusted to best promote the country’s price stability and maximum employment goals. 

According to Powell, the Fed would dial back policy restraint more slowly if the economy remained strong and inflation did not sustainably move towards 2%. He said the Fed would move quicker if the labor market weakened unexpectedly or inflation fell faster. 

The Fed chair pointed out that the economy was not signaling the need to lower interest rates quickly. He added that the country’s economic strength allowed the Fed to approach its decisions carefully. The policy rate path would ultimately depend on how the economic outlook and incoming data evolved.

Powell said the smart move would be to navigate between moving too fast and too slow to ensure the Fed got it right. Going down the middle would help support the labor market and bring inflation down.

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