FOMC Statement and Powell’s Press Conference
December 18, 2024
The FOMC statement announces the Fed’s third rate cut since September, a drop of 25 basis points, matching the market consensus and bring the total decline from peak to a full percentage point. The new federal funds range is 4.25-4.50%. In a 10-1 vote, Cleveland District President Beth Hammack preferred keeping the range at 4.50-4.75%. The first paragraph, which describes recent economic conditions, was left unchanged from the prior November meeting’s statement, which was agreed unanimously.
The other notable difference in the two documents was the addition of five words — the extent and timing of — to the sentence that begins, “in considering [inserted words] additional adjustments to the target range for the federal funds rate,…
The reason for that clarifying phraseology becomes obvious from the updated dot-plot diagram of FOMC individual interest rate paths, that now depicts just two 25-basis point rate cuts during 2025 instead of four as shown in the prior update unveiled at September’s meeting. Likewise, the average inflation rate next year is now forecast as a PCE price deflator rate of 2.5%, 0.4 percentage points higher in the previous update. Two additional cuts are projected in 2026, followed by one cut in 2027. The late 2027 rate level of 3.1% is 25 basis points higher than before, and so too is the imagined long-run neutral rate.
Questions posed to Chairman Powell at the subsequent press conference tried to put words into his mouth, and his responses were largely devoted to reiterating some core principles of Fed policy such as
- The labor market has likely already cooled enough to be permit a full return to 2% inflation without additional slack that may happen.
- Inflation has come down extensively but not all the way to meet the Fed’s objective. So policy needs for now to be in restrictive territory, and officials will need to see inflation drop further to justify more rate cuts.
- In assessing broad trends, officials are looking at a wide variety of factors but avoiding reacting to a few months of observations.
- A full percentage point of interest reduction since September is a significant move. There’s less danger of falling behind the curve in maintaining their full employment objective, and that permits officials to not rush additional future rate cuts. Policy is entering a stage, where it becomes more necessary for inflation to fall before pushing interest rates lower. Core inflation is a better indication of future inflation than total inflation.
- The economy and policy are in a good place. Another year has passed in which U.S. growth exceeded expectations, especially compared to how other major economies applied. A recession was avoided, and inflation is on track to restore the target.
Copyright 2024, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
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