Bank of America strategists expect the Federal Reserve to cut the federal funds rate by 25 basis points to 4.25%-4.5% at its December meeting, with markets already pricing in nearly a full rate cut. The key focus will be on the Fed’s communication regarding future policy direction, particularly through the Summary of Economic Projections (SEP) and Chair Jerome Powell’s press conference remarks.
The report highlights that the FOMC statement language is expected to remain largely unchanged despite recent signs of stalled inflation progress. The Fed is likely to view recent inflation surprises in goods sectors such as new and used cars as temporary, while housing inflation has stabilized at levels consistent with the Fed’s 2% target and November PCE inflation is expected to remain subdued based on CPI and PPI trends.
Within the SEP, the focus will be on the 2025 median dot plot, where the bank’s strategists expect the median projection to indicate three rate cuts in 2025, two in 2026 and none in 2027, moving the policy rate path from 2025 onwards up by 25 basis points relative to the September dots.
Additionally, the strategists anticipate recent commentary from Fed officials indicating a reassessment of the neutral rate, with an increase of 25 basis points to 3.125% in the longer-run median rate. Overall, the report suggests a slower pace of rate cuts ahead, potentially indicating a pause in January if economic data aligns with expectations.
