Now Comes the Pause — Evening Brief – 12.18.24
The Federal Open Market Committee voted to decrease the federal funds rate by a quarter-point on Wednesday – its third consecutive cut – to a range of 4.25% to 4.50%, in a widely expected decision, despite recent bouts of sticky inflation and a resilient economy and job market.
In its Summary of Economic Projections (SEP), the committee forecast half a percentage point in interest rate reductions next year, which is consistent with some officials’ previous comments about reducing the pace in 2025 to assess their impacts, especially with the economy on stable footing.
In September, most Federal Reserve officials expected to make either four or five cuts in 2025. The committee is still “considering the extent and timing of additional adjustments,” the statement read.
David Scherer, co-CEO, Origin Investments, who believes further significant rate cuts are unlikely, said, “I don’t believe they should have cut rates,” in an email to Connect. “The Fed should hold off until there is data that specifically calls for a cut.” Scherer said current data shows “the economy is resilient, strong, and growing and not warranting a cut.”
The SEP indicates that 10 of the 19 members of the FOMC anticipate that rates will be reduced twice next year. Five anticipate that rates will be reduced more than twice, while four anticipate even fewer reductions.
Scherer described President-elect Trump’s proposed initiatives as more extensive, more pronounced, and potentially more consequential than those from his first administration. The cost of goods will be affected by tariffs, even if only for components of products produced in the U.S., and labor markets will be influenced by deportation.
“This will have an impact on inflation, moving it further away from than closer to the 2% target,” Scherer said. “If I was the Fed, I’d wait; and in 2025 I expect them to wait.” He anticipates the federal funds rate to remain in a range of 3.75% to 4.75%.
Chris Duey, head of private real estate debt, Principal Asset Management, shared with Connect in an email that while the rate cut is in line with the firm’s expectations and is supportive for both commercial and residential real estate, he said investors are likely to “proceed with caution” and “interest rates and the cost of capital will remain elevated.” The steeper yield curve at the long end is “tempering optimism.”
Still, Duey remains confident that the quarter-point cut “supports the commercial real estate recovery and a stronger transaction environment in 2025.”
The market is pricing an 88.5% probability that the central bank will pause in January and a 55% probability of a skip in March as well. The odds of the next rate cut begin to move higher for the June and July meetings, according to the CME FedWatch Tool.
For context, the last time the FOMC paused its rate-cutting cycle was during the global financial crisis of 2007 and 2008. The FOMC began cutting interest rates in September 2007 with a 50-basis point move as the subprime mortgage crisis unfolded and financial conditions tightened.
Interest rates were aggressively reduced from 5.25% to 0% by December 2008 – a level at which rates remained until 2015. But the pace of interest rate cuts included a pause to evaluate the effects of cuts already made, specifically during April and October of 2008.