The markets are priced at nearly ninety percent reduction, down by twenty-five basis points in December. While the cut has become almost certain, the real focus will shift to future guidance. The Fed is expected to raise the anticipated reduction path for 2025 from one cut to two cuts, approaching the neutral rate, while removing the language of 'more cuts ahead,' indicating the end of consecutive cuts as a default option.
The data gives the Fed room to maneuver. Its preferred inflation rate (Core PCE) has fallen from 2.9 to 2.8 percent, a slight decrease but enough to support the shift, despite the rising hawkish tone within the committee.
A new balance in the labor market
The dynamics of the labor market have undergone a clear transformation. Slowing immigration and declining participation mean that balanced job growth today ranges between zero and one hundred thousand per month only. That is, modest employment numbers are now sufficient to maintain labor market stability.
The Fed is aware of this reality, so it maintained in its latest economic forecasts:
•Unemployment rate at 4.4 percent
•Inflation at 2.6 percent
•Growth at 1.8 percent
Without any changes.
Increasing division within the committee
Major institutional forecasts reveal the widening gap of opinions within the Fed:
•Goldman Sachs expects a hawkish cut with two dissenting votes.
•Bank of America expects three dissenting votes and a more hawkish statement.
•Wells Fargo sees the committee as 'increasingly divided' with multiple objections.
The market consensus on the cut hides a real internal division.
Structural outlook
In the medium term, the OECD report sees the Federal Reserve's terminal interest rate stabilizing between 3.25 and 3.50 percent until 2027, a level much higher than the pre-pandemic phase, driven by the burden of government debt and structural financial pressures.
