Key takeaways from Fed's final policy meeting of 2024

Fed policymakers reduced benchmark rates by 25 basis points at the December policy meeting.

The US Federal Reserve delivered a 25 basis point (bps) rate cut during its December 16-18 monetary policy meeting, in line with market expectations. This decision, marking the last policy move under the Biden administration, brings the federal funds rate to a target range of 4.25-4.5 percent. Alongside the rate cut, the Fed unveiled a revised dot plot for future rate projections, signaling a more conservative path for monetary easing. The new projections reflect a shift from the September outlook, as policymakers grapple with sticky inflation, robust growth, and labor market resilience.

Key takeaways from the Fed's policy meeting

Rates cut by 25 bps

The Federal Open Market Committee (FOMC) voted 10-1 to lower the benchmark federal funds rate by 25-bps, taking it within a target range of 4.25-4.5 percent. This move was widely anticipated, with investors having nearly fully priced in the likelihood of this quarter-point reduction. With this latest rate reduction, the Fed has cumulatively cut benchmark rates by a full percentage point in the three consecutive meetings.

Lesser rate cuts in 2025

Looking ahead, the Fed now anticipates just two 25-bps cuts in 2025, with rates projected to end the year at 3.75-4.00 percent. A further 50-bps cut is expected in 2026, taking rates to around 3.4 percent. Compared to earlier forecasts, which anticipated 100 basis points of cuts in 2025 and 50 basis points in 2026, the revised outlook reflects a more cautious approach.

This shift in policy stance comes as the Fed adopts a "wait-and-watch" approach amid the impending Trump administration's policies. The revised projections align with expectations of sticky inflation, reflecting the Fed’s focus on managing price pressures without jeopardising economic growth. Fed chair Jerome Powell pointed stronger growth, lower unemployment, sticky inflation and risks of upside risks associated with it as the major factors behind the tempered pace of policy easing.

"We're committed to maintaining our economy's strength by supporting maximum employment and returning inflation to our 2 percent goal," Powell said in the post policy press conference.

Higher inflation forecasts

As Donald Trump begins his second term in the White House, the Federal Reserve warns of significant upside risks to inflation in 2025. Trump’s economic agenda which includes tax cuts, increased tariffs, and reductions in regulations and immigration threaten conflicting implications for growth, employment, and pricing pressures.

The Fed’s latest projections also highlight increased uncertainty around the inflation picture for 2025 as compared to what it anticipated three months ago. Consequently, policymakers have raised their 2025 inflation forecast to 2.5 percent, up from the 2.1 percent estimate in September. Fed Chair Jerome Powell pointed to stubbornly high inflation as the primary driver of this upward revision. Going ahead, the Fed will closely monitor economic and policy developments to reassess its inflation trajectory and interest rate framework for 2025.

Higher growth forecasts 

The US economy is projected to grow by 2.5 percent this year and 2.1 percent in 2025, both higher than previous prediction of 2 percent growth for each year. "Recent indicators suggest that economic activity has continued to expand at a solid pace. The economy is strong overall and has made significant progress toward our goals over the past two years," Powell said.

Lower unemployment projections

Confidence in the labour market remains strong, as unemployment projections were revised lower to 4.2 percent for the current quarter and 4.3 percent for late 2025, down from the 4.4 percent previously expected for each quarter. While Powell did acknowledge some cooling in recent months, he feels the labour market remains robust compared to pre-pandemic levels. "Downside risks to the labour market do appear to have diminished, but the labor market is now looser than pre pandemic, and it's clearly still cooling further," Powell said.

Stance turns more cautious

The Fed is staging the balancing act of managing stubborn inflation while supporting robust economic growth and a resilient labor market. To deal with concerns of a resurgence in inflation, policymakers have take on a cautious, data-driven approach, opting for a "wait-and-watch" stance as they assess the potential impact of proposed tariff policies under the Trump administration.

Jerome Powell said that the Fed is trying to balance two risks: moving too slowly could harm economic activity and the labour market, while moving too quickly could jeopardise progress on inflation. "I just think we need to take our time, not rush and make a very careful assessment, but only when we've actually seen what the policies are and how they're implemented. We're at the stage of doing what other forecasters are doing, which is kind of thinking about these questions, but not trying to get to definitive answers for some time," Jerome Powell said.