As expected, the Fed cut interest rates by 25 basis points at the December 2024 meeting but sent a strong message that the inflation fight is far from over in the Summary of Economic Projections (SEP). In the SEP, FOMC participants made material revisions, including pushing back the timing of a return to the 2-percent inflation target from 2026 to 2027 and slowing the pace of interest rate cuts. Additionally, the cutting cycle may not end until sometime in 2027 or even later, not in 2026.

Trusted Insights For What’s Ahead™

• Unsurprisingly, the Fed cut policy rates by 25 basis points at the December meeting consistent with consensus expectations.
• There was a small likelihood of a pause given stronger-than-expected data and sticky inflation, which likely prompted the Cleveland Fed President to dissent to the cut, and for the Fed Chair to say that cutting was a close call.
• Somewhat surprisingly, FOMC participants dramatically altered projections in the SEP, with major changes to when they believe inflation will stabilize at target and when the Fed can stop cutting interest rates.
• For some FOMC participants, the new SEP did reflect their anticipation of policy changes linked to the incoming US administration.
• In The Conference Board US Economic Forecast for December 2024, posted earlier this week, we raised growth and inflation forecasts and lifted the unemployment rate a tad for the next two years as the Fed did.
• We also delayed the timing of convergence to the 2 percent inflation target and when the Fed would stop cutting.
• However, the SEP’s changes are more dramatic relative to our projections (we expected the Fed to stop cutting by Q4 2025), and the consensus of economists who expected the Fed to stop cutting in Q1 2026 not in 2027 or later.
• Still, the Fed Chair reiterated that the SEP is not a forecast and the FOMC will be data dependent next year and will cut rates as it sees fit.
• For now, we maintain our expectation of a pause at the January 2025 meeting but are less certain about a March 2025 cut.

Figure 1. Fed SEP Projects Much Slower Pace of Rate Cuts Than Expected

Sources: Federal Reserve Board and The Conference Board projections.

Report Highlights

Fed Cuts Rates in December But Delays End of Cycle

The Fed lowered policy rates by another 25 basis points in December, reducing rates by a full 1 percentage points from their respective peaks. This was expected. However, FOMC participants in the SEP reduced the number of possible interest rate cuts in 2025 from four to two, placing the target at 3.75-4.00 percent by the end of 2026 instead of 3.25-3.50 percent. They also expect to continue cutting rates into 2027 or perhaps later rather than in 2026. We forecasted five rate cuts in Q4 2025 and the Fed ending its cutting cycle in Q4 2025. The December Bloomberg consensus expected four rate cuts in 2025 and the Fed ending its cutting cycle in Q1 2026.

Hotter Real Economy Fueled Slower Cutting Path

According to the Fed Chair, the major revisions in December SEP projections relative to the September SEP reflected stronger-than-expected real GDP growth, lower-than-expected unemployment, higher-than-expected inflation, being closer to the neutral policy rate, and greater uncertainty around future inflation. Indeed, the Fed indicated that the risks to inflation outlook were tilted more to the upside (i.e., higher-than-expected).

Real GDP

The FOMC expects Q4/Q4 real GDP growth of 2.5 percent in 2024 (from 2.0 percent); 2.1 percent in 2025 (from 2.0 percent). The 2026 GDP forecast was unchanged at 2.0 percent, but the 2027 projection was lowered to 1.9 percent (from 2.0 percent). The Conference Board projected that real GDP Q4/Q4 will be 2.4 percent in 2024, 1.9 percent in 2025, and 1.7 percent in 2026.

Inflation

The FOMC expects Q4/Q4 total Personal Consumption Expenditure (PCE) deflator inflation to be 0.1 percentage point higher in 2024 at 2.4 percent, 0.4 percentage point higher in 2025 at 2.5 percent, and 0.1 percentage point higher in 2026 at 2.0 percent. The 2027 rate was unchanged at 2.0 and matched the longer-run projection. We forecasted that total PCE inflation Q4/Q4 will be 2.3 percent in 2024, 2.0 percent in 2025, and 2.0 percent in 2026.

The FOMC expects Q4/Q4 core PCE (i.e., total less food and energy) deflator inflation to be 0.2 percentage point higher in 2024 at 2.8 percent, 0.3 percentage point higher in 2025 at 2.5 percent, and 0.2 percentage point higher in 2026 at 2.2 percent. The 2027 rate was unchanged at 2.0. We anticipated that core PCE inflation Q4/Q4 will be 2.8 percent in 2024, 2.0 percent in 2025, and 2.0 percent in 2026.

Unemployment Rate

The December SEP projects lower end-of-year unemployment rates in 2024 and 2025 (4.2 percent and 4.3 percent, respectively) compared to the September SEP (4.4 percent and 4.4 percent, respectively). The 2026 unemployment rate was unchanged at 4.3 percent, but the 2027 rate was increased from 4.2 percent to 4.3 percent. We projected an unemployment rate of 4.2 by end-2024, and 4.0 by end-2025 and through end-2026.

Some FOMC Members Priced In New Administration’s Proposed Policy Changes

Indeed, the Fed Chair noted in his press conference that in the SEP some FOMC participants did consider potential policy changes implemented by the incoming Administration in their projections. Policy changes might include trade wars, deregulation, tax cuts, and/or spending cuts.

According to the Fed Chair, “some” people did say that they incorporated highly conditional estimates of economic effects of policies into their forecasts, “some” said they did not, while others said nothing. Still the Chair said that underperforming inflation is probably the biggest single factor for the change in the rates trajectory.

Figure 2. FOMC December 2024 Summary of Economic Projections

Source: Federal Reserve Board.