The pace of interest rate cuts will slow in 2025 as the Federal Reserve (Fed) released its updated Summary of Economic Projections (SEP) and dot plot as part of its December 17-18 Federal Open Market Committee (FOMC) meeting decision, which saw the Fed elect to reduce rates for the third consecutive meeting.
“This was a hawkish cut by the Fed, where it accepted that it would take a longer time to bring down inflation,” said Raymond James Chief Economist Eugenio Alemán. “At the same time, Fed Chair Jerome Powell indicated that the decision to cut was a ‘close call.’ This is the first time he has indicated that the meeting decision was more difficult than expected.”
As inflation remains sticky and the U.S. economy continues to demonstrate its resilience, the Fed found it appropriate to update the number of forecasted rate cuts in 2025, revising down the four projected cuts in the September SEP to two with this latest SEP and dot plot. The SEP also indicated two reductions in 2026 and one in 2027.
Markets were not pleased with the updated dot plot projections, which led to the Dow Jones Industrial Average falling into negative territory for the 10th straight day, its longest losing streak since 1974.
“We have highlighted that we are less concerned about the number of cuts and more focused on the overall trajectory of the economy. As the Fed is reducing rate cuts for the right reasons, preemptively, to ensure the strong underpinning of the economy, the trajectory of the equity market should remain higher longer-term, as earnings are supported to the upside,” said Raymond James Chief Investment Officer Larry Adam. “However, with the equity market ‘priced to perfection’ as valuations are near multi-year highs, it was not surprising to see volatility move higher following the meeting decision.”
“Given the historically high level of optimism surrounding the prospects for the economy, the Fed, President-elect Trump’s policy agenda and the equity market, disappointments can lead to periods of volatility like what occurred post-meeting decision,” noted Adam. “This is a theme that is likely to play out more in 2025, as our team expects volatility to remain elevated.”
