According to fixed-income markets and recent speeches from Fed governors, the Federal Reserve is likely to cut rates this month.
As of December 4, prediction site Kalshi places the chance of a 25 bps cut at 71%. At the same time, just over 75% of interest rate traders expect a quarter percentage point cut at the December 18 Fed meeting.
The Federal Reserve has also signaled that further cuts are likely.
“Based on the economic data in hand today and forecasts that show that inflation will continue on its downward path to 2 percent over the medium term, at present I lean toward supporting a cut to the policy rate at our December meeting. But that decision will depend on whether data that we will receive before then surprises to the upside and alters my forecast for the path of inflation,” Fed Governor Christopher Waller said on December 2, per Forbes.
Should the Fed lower rates this month, it would represent the third cut this year.
In September, the central bank began unwinding rates with a significant 50 bps drop. In November, a further quarter percentage point reduction was implemented, bringing rates down to their current level of 4.75%.
“In light of the progress toward our goals, my colleagues and I on the FOMC judged it appropriate to lower our policy rate in September and again last month. These actions were steps toward removing restraint, as we are in the process of moving policy toward a more neutral setting,” said Fed Governor Andrea Kugler.
The aggressive rate tightening that preceded the recent unwinding was a response to the dramatic increase in inflation in recent years. As reported in The Dallas Express, price acceleration peaked in June 2022 when it hit 9.1%.
While it has subsided substantially since then, as of October, the U.S. Personal Consumption (PCE) price index, the Fed’s favored inflation gauge, was up 2.3% annually. This is 0.3 percentage points higher than the Fed’s target of 2% and represents an increase from the 2.1% witnessed in September.
“Looking ahead, it is important to emphasize that policy is not on a preset course. I will make decisions meeting by meeting and carefully assess incoming data, the evolving outlook, and the balance of risks,” stated Kugler.