The next Federal Reserve meeting is here. Markets fully expect that policymakers will cut their key interest rate today for the third straight Fed meeting. The November employment report, which showed job gains stabilizing at a modest level, and somewhat encouraging inflation reports last week have sealed the deal for more interest-rate relief.
Yet the gift of a Fed rate cut may be delivered in hawkish packaging. That's because the upcoming Fed meeting isn't just about setting policy. It's also about setting expectations for 2025 and beyond, and Fed policymakers may provide something of a reality check about how low rates will go.
When Is The Fed Meeting Announcement?
The two-day Fed meeting ends today with a policy statement at 2 p.m. ET. Fed Chairman Jerome Powell holds a press conference at 2:30 p.m.
Will The Fed Cut On Dec. 18?
At the moment, markets are pricing in 95% odds of a 25-basis-point rate cut, according to CME Group's FedWatch tool. That would lower the Fed's key rate, the federal funds rate, to a range of 4.25% to 4.5% from the current range of 4.5% to 4.75%.
However, the chance of a fourth-straight rate cut looks slim. Markets currently see just 16% odds of a rate cut at the January meeting.
For 2025, markets are pricing in a year-end federal funds rate of 3.93%. If the Fed cuts a quarter-point as expected this month, market pricing implies a likelihood of two further quarter-point moves next year. But markets see a fair chance (42%) of just one 25-basis-point rate cut next year.
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Fed Policy Considerations
The Fed is expected to cut rates because policymakers still see their current interest-rate setting as restrictive, meaning it is acting as a brake on economic growth. The Fed aims to lift its foot off the brake to get to a neutral level before tight policy unnecessarily weakens the labor market.
However, Fed Chairman Jerome Powell described the U.S. economy as being "in very good shape" at The New York Times DealBook event on Dec. 4, just prior to the November jobs report. Downside risks to the labor market have diminished, removing any urgency to lower rates again, Powell indicated. "We can afford to be a little more cautious as we try to find neutral," the interest-rate level at which policy is neither restrictive nor accommodative.
The reason policymakers may decide to slow the pace of rate cuts is that their primary inflation gauge, the core PCE price index, ticked up to 2.8% in October and progress toward the 2% inflation target appears to have stalled.
Fed Meeting Agenda
The Fed's 2 p.m. policy statement will announce the decision whether to lower the range of the federal funds rate by another 25 basis points.
Policymakers also will provide an update on the Fed's balance sheet policy. Each month, the Fed is currently letting up to $25 billion in Treasury securities and $35 billion in government-backed mortgage securities run off its balance sheet as they mature, rather than reinvesting the sum.
The stock market's reaction will depend not just on the rate-cut decision, but on new Fed economic projections that also will be released at 2 p.m. and what Fed Chair Jerome Powell says at his 2:30 p.m. news conference.
The new economic projections, released once per quarter, will include the "dot plot" — a dot for each individual policymaker's assessment of where rates are headed by the end of 2025, 2026 and beyond. Investors focus on the median projection, which indicates whether hawks or doves have the upper hand.
What Do Fed Rate Cuts Mean For The S&P 500?
The Fed sets monetary policy to meet its dual mandates for price stability and full employment. Policymakers cut interest rates when the balance of risks tilt toward inflation falling too low — below the Fed's 2% inflation target — or unemployment rising too high.
When the Fed is cutting rates, or even has a bias toward rate cuts, the "Fed Put" is said to be in force. A put option gives investors downside protection if a stock falls below a certain price. When Wall Street says there's a "Fed Put," the implication is that Powell & Co. will ride to the rescue if the S&P 500 sells off, because a falling stock market could keep the Fed from achieving its mandates.
An environment in which the Fed is cutting rates doesn't ensure the S&P 500 will keep marching higher, but it does provide assurance that emboldens investors to buy the dip when markets correct.
History shows that the S&P 500 usually fares well in the 12 months following the Fed's first move to lower interest rates. Over the prior 11 rate-cutting cycles, the S&P 500 has averaged a 14.3% gain in the 12 months following the first cut. The median 12-month S&P 500 gain has been 20.1% over those 11 cycles. The major exceptions came after the Fed began cutting in 2001 and 2007, because Fed easing didn't prove sufficient to avert recession and a hit to S&P 500 earnings.
Through Tuesday, the S&P 500 has rallied 7.4% since the day before the Fed's surprise 50-basis-point rate cut on Sept. 18.
Be sure to read IBD's The Big Picture column after each trading day to get the latest on the prevailing stock market trend and what it means for your trading decisions.
Fed Meeting Calendar 2025
Jan. 28-29
March 18-19 (Quarterly rate and economic projections)
May 6-7
June 17-88 (Quarterly rate and economic projections)
July 29-30
Sept. 16-17 (Quarterly rate and economic projections)
Oct. 28-29
Dec. 9-10 (Quarterly rate and economic projections)
