The U.S. Federal Reserve is almost certain to hold short-term rates steady at the conclusion of their Dec 12-13 meeting. The decision will be announced at 2pm E.T. on December 13. Currently, the CME FedWatch Tool puts the chance of an interest rate hike at just 3%. However, beyond a likely uneventful meeting outcome, traders will be looking for clues for how the Fed is thinking about 2024.
Summary of Economic Projections
Some of the more important data the Fed will release will come from the Fed’s Summary of Economic Projections (these are referred to as “Projection Materials” on the Fed’s calendar).
These projections will be updated on December 13 in the first update since September 20. The Fed only updates these forecasts at every other meeting. In September, the median expectation for rates in December 2024 was 5.1% with PCE inflation estimated at 2.5%.
There has been a significant economic data since those estimates, most of it broadly favorable as inflation has trended lower and growth and jobs data has remained broadly robust. As such, it will be interesting to see if the Fed lowers its interest rate and inflation expectations for December 2024. This information will help the market gauge the potential size of interest rate cuts.
Currently the markets see short-term rates at a median level of 4.25% for December 2024, significantly below the Fed’s September 5.1% estimate for the same month. The equity market’s recent rally too, likely reflects, in part, a lower rate outlook for 2024.
Comments on Future Rate Hikes
Even in relatively recent statements, such as Fed Chair Jerome Powell speaking at Spelman College on December 1, Fed officials have outlined scenarios under which interest rates would increase from current levels.
That said, policymakers have revised their language since the summer to explain that higher rates are now more a contingency than a certainty as 2024 draws closer. However, markets will assess how Jerome Powell discusses 2024 during the press conference following the rate announcement on December 13. Previously, he’s been unwilling to get into much discussion of interest rate cuts.
Just as the Fed policymakers have kept the prospect of higher rates as a topic in their recent speeches, so they have downplayed near-term rate cuts. Nonetheless, the Summary of Economic Projections even from September made clear that the Fed did broadly expect rates to end 2024 below current levels, just with smaller cuts than the market currently anticipates and perhaps weighted to the second half of 2024.
What To Look For
While the formal announcement at December’s meeting may itself be uneventful, the supporting data and press conference comments could prove insightful for markets.
To date, Fed officials have made clear that they believe another interest rate increase could occur under certain scenarios. If they update that language to introduce the prospect of interest rate cuts and bring down their 2024 interest rate expectations via the Summary of Economic Projections (as compared to September’s forecast), then the Fed may be moving closer to current market expectations.
However, if the Fed continues to discuss the prospect of strong economic growth and a robust jobs market potentially hindering their inflation fight, then the market may be prompted to revise its current assessment. Namely, that interest rate cuts could occur by spring 2024.
Both the markets and Fed currently broadly agree that rates will likely move lower in 2024. For now, the markets are more aggressive on both the size of potential 2024 interest rate cuts and the speed of implementation.