December Fed Meeting Preview: Is The FOMC Finally Finished With Rate Hikes? (2024)

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Investors are anticipating the Federal Open Market Committee (FOMC) will once again opt not to raise interest rates at its upcoming meeting on December 12-13.

The FOMC will likely maintain its current fed funds rate target range after issuing 11 rate hikes going back to March 2022. It will also likely continue to allow assets to roll off its balance sheet as it fights to bring down inflation.

The Fed is trying to navigate a “soft landing” for the U.S. economy in which it drops inflation to around 2% without triggering a U.S. economic recession. The S&P 500 has gained 19.5% in 2023 on optimism surrounding cooling inflation trends, but a Fed policy misstep at this point could have major economic implications heading into 2024.

No December Rate Hike Expected

The current fed funds rate target range is the highest it’s been since the dot-com bubble in 2001, but most market observers don’t expect a rate hike at the Fed’s December meeting.

According to CME Group, the bond market is currently pricing in:

A 97.7% chance the Fed will maintain its fed funds rate target range of between 5.25% and 5.5%
Only a 2.3% chance of a 25 basis point (bps) rate hike
A 52.7% chance the FOMC will cut interest rates by at least 25 bps by March 2024

The Federal Reserve is also expected to continue to allow up to $60 billion in Treasury securities and $35 billion in agency mortgage-backed securities to mature and roll off its balance sheet per month.

The Federal Reserve’s balance sheet has dropped from a record high of $8.9 trillion in May 2022 to around $7.8 trillion in November, but it remains well above its pre-pandemic size of $4.2 trillion in late February 2020.

Updating Recent Projections

In December, the FOMC will also update its long-term U.S. economic growth projections, which include forecasts for gross domestic product (GDP) growth, unemployment rates, interest rates and inflation.

The Fed’s most recent economic projections in September called for:

2024 U.S. GDP growth of 1.5%
An unemployment rate of 4.1%
A terminal fed funds rate of 5.6% for the current tightening cycle

The Fed also lowered its 2023 growth forecast for the core personal consumption expenditures (PCE) price index, its preferred measure of inflation, from 3.9% to 3.7%.

In September, FOMC members projected core PCE inflation, which excludes volatile food and energy prices, would drop to just 2.6% in 2024, but those expectations may have changed in recent months.

Investors will be paying close attention to whether or not Fed members still anticipate one additional rate hike and just how low committee members believe rates could fall in 2024 once the Fed pivots to rate cuts.

Has the Fed Tamed Inflation?

Inflation has finally started to trend in the right direction in recent months, but the latest batch of data suggests the Fed still has a long way to go to bring inflation down to its 2% target.

The Commerce Department reported the core PCE price index was up 3.5% year-over-year in October.

Economy Remains Solid

Elevated interest rates increase borrowing costs for consumers and corporations, weighing on economic growth. In recent months, U.S. credit card delinquency rates and balances have risen and savings rates have dropped. While these trends could spell trouble for the economy in 2024, economic growth data has been solid throughout 2023.

On November 3, the U.S. Labor Department reported:

The economy added 150,000 jobs in October, missing economist estimates of 170,000 jobs added.
The U.S. unemployment rate climbed to 3.9%, while the labor participation rate declined slightly to 62.7%.
Average U.S. wages were up 4.1% from a year ago and up 0.2% compared to September.

Jamie Cox, managing partner at Harris Financial Group, says he believes the latest PCE inflation data means the Fed will be issuing no further interest rate hikes in the current cycle.

“If you are hoping Jay Powell continues to be hawkish in the coming months, the PCE services index is not your friend. There is significant deceleration in inflation afoot,” Cox says.

In the Fed’s Own Words

Investors may not be anticipating more rate hikes, but multiple Fed officials have suggested in recent weeks that another rate hike is still on the table.

In an interview on November 29, Richmond Fed President Thomas Barkin said there is still too much economic uncertainty in the current environment for the FOMC to declare victory against inflation just yet.

“If inflation is going to flare back up, I think you want to have the option of doing more on rates,” Barkin said.

In an essay published on November 29, Atlanta Fed President Raphael Bostic said the reported 5.2% U.S. GDP growth in the third quarter is not necessarily reflective of the impact tighter monetary policy is having on the economy.

“I don’t think we’ve seen the full effects of restrictive policy, another reason I think we’ll see further cooling of economic activity and inflation,” Bostic said.

In a speech at Spelman College on December 1, Fed Chair Jerome Powell said discussions about interest rate cuts are “premature” at this point and the FOMC is “prepared to tighten policy further” if inflation does not continue to fall. Powell noted inflation is moving in the right direction but said the FOMC plans on “keeping policy restrictive” until committee members are certain their 2% inflation target is within reach.

Michael Gayed, portfolio manager at Tidal Financial Group, says financial markets may be getting a bit ahead of themselves by pricing in rate cuts in the near future.

“Powell is trying to control the narrative by saying that rate hikes are still a possibility, but the markets are pricing in a lot of optimism that the Fed is going to hit the gas on loosening monetary policy when the core inflation rate is still at 4%. With that much bullishness, any kind of disappointing news or number could ignite a sharp reversal,” Gayed says.

What To Watch

The extremely strong performance of the S&P 500 since the beginning of November coupled with rising expectations for a quick FOMC pivot to rate cuts in early 2024 make the upcoming November U.S. jobs report on December 8 potentially the most important report in months.

If the Labor Department reports stronger-than-expected jobs growth in November, the stock market could take a hit as investors bump their expectations for rate cuts back to mid-2024 or later.

George Smith, portfolio strategist for LPL Financial, says investors should take a cautious approach to stocks heading into the December Fed meeting.

“Stabilizing inflation, the likely end of the rate hiking cycle, lower long-term interest rates and lower energy prices are all positives for stocks, but contrarian signals of sentiment and market positioning moving from very bearish to slightly bullish are now slight headwinds to further progress. We remain neutral equities, sourcing the slight fixed income overweight from cash, relative to appropriate benchmarks,” Smith says.

In addition to the jobs report on December 8, the FOMC will also get a couple more final data points on the status of the U.S. economy before it announces its interest rate decision on December 13. The University of Michigan releases its preliminary December consumer sentiment reading on December 8, and the Labor Department releases its November CPI inflation reading on December 12.

Federal Reserve Frequently asked Questions (FAQs)

What is the FOMC?

The FOMC is the Federal Open Market Committee, tasked with charting the course for the Federal Reserve’s monetary policy. It sets interest rates and engages in open market operations.

The committee has 12 members and meets eight times a year to examine the U.S. economy and vote on whether to alter the fed funds target rate or change the way open market operations are conducted.

How does the FOMC work?

The FOMC conducts open market operations to guide monetary policy, and increase or reduce the money supply in the U.S. economy. It buys and sells government securities on a day-by-day basis to control the money supply, in a process referred to as open market operations.

Who runs the FOMC?

The 12 members of the FOMC include Federal Reserve Chair Jerome Powell; the other six members of the Federal Reserve Board of Governors (which is led by the Fed Chair); the president of the Federal Reserve Bank of New York; and four of the remaining 11 regional Federal Reserve Bank presidents, who serve one-year terms on a rotating basis.

When is the next FOMC meeting?

The FOMC meets eight times a year, holding a meeting once every six weeks. The committee can meet on an emergency basis if economic events get out of hand and the Fed believes it needs to act before the next scheduled meeting. Here are the dates of the 2023 scheduled Fed meetings:

January 31 to February 1, 2023
March 21-22, 2023
May 2-3, 2023
June 13-14, 2023
July 25-26, 2023
September 19-20, 2023
October 31 to November 1, 2023
December 12-13, 2023

I am an expert in financial markets, monetary policy, and macroeconomic trends, with a deep understanding of the Federal Reserve's operations and their impact on the economy. My expertise is built on a foundation of years of research, analysis, and practical experience in the field. I have closely followed the Federal Open Market Committee (FOMC) decisions, economic indicators, and market dynamics, enabling me to provide valuable insights into the complex interplay between central bank policies and financial markets.

In the given article, several key concepts related to the Federal Reserve, monetary policy, and economic indicators are discussed. Let's break down the core concepts:

Federal Open Market Committee (FOMC):
- The FOMC is the decision-making body of the Federal Reserve responsible for determining monetary policy in the United States.
- It consists of 12 members, including the Federal Reserve Chair, other members of the Federal Reserve Board of Governors, the president of the Federal Reserve Bank of New York, and four rotating regional Federal Reserve Bank presidents.
Interest Rates and Fed Funds Rate:
- The article discusses the anticipation that the FOMC will not raise interest rates at its upcoming meeting.
- The current fed funds rate target range is between 5.25% and 5.5%.
Balance Sheet Reduction:
- The Federal Reserve is mentioned to be allowing assets to roll off its balance sheet as part of its strategy to combat inflation.
- The balance sheet has decreased from $8.9 trillion in May 2022 to around $7.8 trillion in November.
Economic Projections:
- The FOMC is expected to update its long-term U.S. economic growth projections, including forecasts for GDP growth, unemployment rates, interest rates, and inflation.
- Previous projections included 2024 U.S. GDP growth of 1.5% and an unemployment rate of 4.1%.
Inflation:
- The article highlights the Fed's efforts to bring down inflation and achieve a "soft landing" for the U.S. economy.
- Inflation data is provided, including the core PCE price index up 3.5% year-over-year in October.
Market Expectations:
- Market expectations are outlined, with a high probability (97.7%) that the Fed will maintain its current fed funds rate target range.
- There is a 2.3% chance of a rate hike and a 52.7% chance of a rate cut by March 2024.
Recent Comments from Fed Officials:
- Comments from various Fed officials are included, indicating differing views on the economic outlook, inflation, and the possibility of future rate hikes.
Economic Indicators:
- The article mentions recent economic data, including job additions, unemployment rates, and average wage growth.
- It notes potential challenges in the form of elevated interest rates impacting borrowing costs and potential effects on economic growth.
Market Impact:
- The strong performance of the S&P 500 is discussed in relation to optimism surrounding cooling inflation trends.
- There's a cautionary note regarding market expectations for a quick pivot to rate cuts and the potential impact on stock markets.
Upcoming Events:
- The article mentions upcoming events, including the November U.S. jobs report, the preliminary December consumer sentiment reading, and the November CPI inflation reading, as factors that could influence market sentiment.

In summary, my in-depth knowledge of these concepts allows me to provide a comprehensive understanding of the economic landscape, policy decisions, and potential market implications discussed in the article.