FOMC rate decision takes center stage today, with a 25bps rate cut widely anticipated, lowering the federal funds rate to 4.25–4.50%. Markets see virtually no chance of a different outcome, making the focus squarely on Fed Chair Jerome Powell’s statement and the updated economic projections. Expectations are for Fed to signal a slower pace of easing in 2025, aligning with signs of a resilient economy and sticky inflation.
Three key questions arise from today’s new projections.
First, the possibility of a pause in January is in focus. With markets pricing an 84% probability of no rate change at the next meeting, the voting split within the FOMC could hint at how close policymakers are to a pause in the easing cycle.
Second, attention will shift to the pace of easing in 2025. Fed’s prior projections and dot plot suggested a median rate of 3.4% by the end of next year. Markets are currently pricing in a 33% chance of rates falling to 3.75–4.00% by December 2025. A significant upward revision in Fed’s median forecast would signal caution about inflation persistence and align with tighter-than-expected monetary policy.
Third, the neutral rate will be scrutinized. The previous projection of a longer-run rate was 2.9%, slightly higher than 2.8% in June. A move toward or above 3% could be psychologically significant, signaling higher baseline expectations for economic growth and inflation stability in the post-tightening environment.
In terms of market reactions, Fed’s “hawkish cut” could lift both the 10-year Yield and Dollar Index. However, breaking out of current ranges will require more than today’s decision.
For the DXY, resistance at 108.07 must be cleared to confirm underlying bullish momentum, which would likely need support from a 10-year yield break above 4.505%. These breakouts would likely hinge on clarity around fiscal and trade policies from the incoming administration.
Japan’s core CPI reaccelerates to 2.7%, driven by energy and rice
Japan’s core CPI (excluding food) rose to 2.7% yoy in November, marking the first reacceleration in three months and exceeding market expectations of 2.6% yoy. Core inflation has remained above the BoJ’s 2% target since April 2022, highlighting persistent price pressures. This increase was attributed to reduced government subsidies for utility bills and a sharp rise in rice prices.
Energy prices surged 6.0% yoy, up from October’s 2.3% yoy gain. Within this category, electricity prices jumped 9.9% yoy, and city gas costs climbed 6.4% yoy. Meanwhile, rice prices soared by a staggering 63.6% yoy, the steepest increase since 1971, driven by last year’s unusually hot summer that disrupted production.
Core-core CPI (excluding food and energy) ticked up from 2.3% yoy to 2.4% yoy, while headline CPI rose to 2.9% from October’s 2.3%. Service prices, a key indicator for BOJ as they often reflect wage dynamics, increased 1.5% yoy, unchanged from the prior month.
Full Japan CPI release here.