With the December meeting of the Federal Open Market Committee of the Federal Reserve coming up in two weeks, attention is again focused on whether there will be another rate cut.
There’s a split, with the Fed on one side, and most financial institutions on the other. You might guess where this is going. And a couple of central bank officials — Governor Christopher Waller and New York Fed President and CEO John Williams — gave speeches on Monday, December 2, that picked up the theme that much is still unknown.
The Fed is being cautious because it doesn’t want to set unrealistic expectations and it’s been signaling the potential to surprise those who expect a march to a low-interest-rate sea. In fact Chair Jerome Powell in early October said not to expect the organization to hurry on rate reductions. In mid-November, he said, “The economy is not sending any signals that we need to be in a hurry to lower rates.”
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And now Waller, who sits on the FOMC and votes on rates, at the American Institute for Economic Research Monetary Conference said he was “leaning toward continuing the work we have started in returning monetary policy to a more neutral setting.” That would mean reducing rates, which he didn’t see as a significant danger. “Policy is still restrictive enough that an additional cut at our next meeting will not dramatically change the stance of monetary policy and allow ample scope to later slow the pace of rate cuts, if needed, to maintain progress toward our inflation target,” said Waller.
However, he also was “less pleased about what the data have been telling us the past couple of months about inflation,” which edged up again. “That said, if the data we receive between today and the next meeting surprise in a way that suggests our forecasts of slowing inflation and a moderating but still-solid economy are wrong, then I will be supportive of holding the policy rate constant.,” Waller added.
At the Queens Chamber of Commerce, Williams explained that the Fed is reducing rates because “while growth in demand has been strong, growth in supply has been even stronger.” They have thought that by allowing more economic activity with lower rates, the overall economy could come back into balance.
“Still, inflation remains above our 2 percent longer-run target, and it will take some time to achieve our inflation goal on a sustained basis,” Williams added.
They make a 25-basis-point cut in December a reasonable bet, but that still depends on what data they see.
Now for the financial institutions. Deutsche Bank chief U.S. economist Matthew Luzzetti thinks the Fed will cut in the December meeting, but then pause for 2025. During the interview with Bloomberg TV, he listed two reasons for his view. One, “the details of our underlying economy that we see now,” and two, “extensions of tax cuts, perhaps further tax cuts, tariff policy, which lifts inflation” which could lead to the need of higher interest rates.
However, as Reuters reported, more than a dozen brokerages expect at least a 25-basis-point cut (Citigroup went with 50). And then, most look to between 50 and 100 basis points of cuts through 2025.
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