Wall Street is betting the Fed will deliver a final 2024 rate cut and get more cautious about 2025

Investors widely expect the Federal Reserve to cut interest rates Wednesday by a quarter percentage point, the third and final reduction of 2024.

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But their bigger question is whether the central bank is ready to scale back its expected cuts for 2025 — and how Chair Jerome Powell will address questions about the Fed’s path at his Wednesday afternoon press conference.

“Fed Chair Powell will face the delicate exercise of having to reconcile a 25 basis point rate cut with stronger economic and inflation projections and a more gradual policy easing trajectory,” said Greg Daco, chief economist for EY.

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All eyes will be on the so-called “dot plot,” a chart updated quarterly that shows the prediction of each Fed official about the direction of the federal funds rate.

In September, as the central bank initiated its first rate cut in more than four years, the dot plot revealed a consensus among Fed officials for two more cuts in 2024 and four small additional reductions in 2025.

Now, that 2025 projection is in question following a string of stubborn inflation readings and cautious commentary from Fed officials. Many Fed watchers expect policymakers to pull back their estimates for next year.

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“We expect the main message of the December meeting to be that the FOMC anticipates that it will likely slow the pace of rate cuts going forward,” Goldman Sachs chief economist Jan Hatzius said in a note.

Hatzius has revised his forecast for 2025 to eliminate a cut in January, but he continues to expect cuts in March, June, and September next year, ending with a slightly higher neutral rate of 3.5-3.75%.

That prior prediction of four rate cuts next year has “got to be rethought,” former Cleveland Fed president Loretta Mester told Yahoo Finance.

Two or three cuts in 2025 “seems right to me.”

Some Fed watchers disagree, saying Fed officials will stick with their estimates for four cuts in 2025.

“The story overall is they still expect inflation to come down,” said Wilmington Trust chief economist Luke Tilley, who expects the median 2025 estimate to stay at four reductions.

“They still think rates are restrictive.”

Unless there is a sharp slowdown in the job market, regaining more confidence that inflation is in fact heading back down is likely to be the most important factor in determining the timing of the next rate cut, according to Deutsche Bank chief US economist Matt Luzzetti.

“The Fed can afford to be patient with the economy continuing to show strength and downside risks to the labor market having diminished,” Luzzetti added. “Incoming inflation data have exceeded expectations and have raised the risks that progress will be slower than anticipated, if not stall.”

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