Summary
- As universally expected, the FOMC decided at its policy meeting today to keep rates unchanged. The decision to maintain the target range for the federal funds rate at 4.25%–4.50% was universally supported by all 12 voting members of the FOMC.
- The post-meeting statement continued to describe the pace of economic activity as “solid.” It also upgraded its characterization of the labor market. Previously, the Committee said that “labor market conditions have generally eased.” The FOMC now views labor market conditions as “solid.”
- The FOMC continues to characterize inflation as “somewhat elevated.”
- In sum, there was little in today’s statement to suggest the FOMC is contemplating another rate cut in the near future.
- With the pace of real economic activity holding up and with inflation remaining above target, we think the FOMC will keep rates on hold until the second half of 2025.
FOMC Appears To Be in Little Hurry to Cut Further
As universally expected, the Federal Open Market Committee (FOMC) left its target range for the federal funds rate unchanged at 4.25%–4.50% at the conclusion of its meeting today. Unlike in December, when Cleveland Fed President Beth Hammack dissented from the decision to cut rates by 25 bps—she preferred to keep rates on hold at that meeting—today’s decision was unanimously supported by all 12 voting members of the Committee.
The post-meeting statement continued to note that “economic activity has continued to expand at a solid pace.” It also stated that “the unemployment rate has stabilized at a low level in recent months.” In that regard, the unemployment rate trended up from 3.4% in April 2023 to 4.2% in mid-2024. But it has subsequently leveled off at just over 4% (Figure 1). The statement went on to characterize labor market conditions as “solid.” This characterization of the labor market represents an upgrade from the December statement, which said that “labor market conditions have generally eased.”
Additionally, the December statement noted that “inflation has made progress toward the Committee’s 2 percent objective,” although it continued to describe inflation as “somewhat elevated.” Today’s statement simply said that “inflation remains somewhat elevated.” In that regard, the year-over-year change in the core PCE deflator, which Federal Reserve officials believe is the best measure of the underlying rate of consumer price inflation, has leveled off noticeably above the FOMC’s target of 2% (Figure 2).
In sum, there was little in today’s statement to suggest the FOMC is contemplating another rate cut in the near future. The Summary of Economic Projections (SEP), which is the quarterly document that summarizes the macroeconomic forecasts of the individual Committee members, that was released in December showed that the median Committee member thought that an additional 50 bps of rate cuts would be appropriate by the end of the year. If the FOMC views only 50 bps of rate cuts by December as appropriate, then it clearly does not need to be in a hurry to cut rates.
Outlook; FOMC on Hold Until Second Half of 2025
As highlighted in our most recent U.S. Economic Outlook, we look for the FOMC to maintain its current target range for the federal funds rate until the second half of the year (Figure 3). Indeed, Chair Powell noted in his post-meeting press conference that policy “is significantly less restrictive” today than it was before the FOMC started to cut rates, which “means we do not need to be in a hurry” to ease further. As noted above, real economic activity is holding up reasonably well. If, as we expect, real GDP grew at an annualized rate of 2.3% in Q4-2024 on a sequential basis, then the economy would have expanded at a solid rate of 2.5% on a year-over-year basis. (The Bureau of Economic Analysis will release Q4 data on Thursday, January 30.) Additionally, we estimate that nonfarm payrolls rose by a solid 185K in January. (The Bureau of Labor Statistics will release employment data for January on February 7.) With inflation remaining stubbornly above target, we see little reason for the FOMC to cut rates in the near term. But with policy remaining somewhat restrictive, albeit not as restrictive as a few months ago, we are penciling in another 50 bps of easing by the end of 2025 (25 bps in September and another 25 bps in December). Thereafter, we look for the FOMC to maintain its target range at 3.75%–4.00% through the end of 2026.
The FOMC also made no changes today to the pace of balance sheet runoff, commonly referred to as “quantitative tightening” (QT). Specifically, the monthly caps of $25 billion of Treasury securities and $35 billion of mortgage-backed securities (MBS) will remain in place. Since peaking in early 2022 at roughly $9 trillion, the Fed’s balance sheet has shrunk by about $2 trillion (Figure 4). As we wrote in our recent “Flashlight” report, we look for balance sheet runoff to continue through May. Starting June, we look for the Fed to maintain a constant size for the balance sheet through at least the end of the year. That said, we believe that the central bank wants to continue to reduce its MBS holdings, which currently total $2.2 trillion. Therefore, we think the Fed will begin to replace MBS paydowns one-for-one with Treasury securities.
