Fed decision in January?

The Federal Reserve's January 2025 interest rate decision comes at a pivotal time in the economic cycle, with multiple indicators suggesting a transition toward more accommodative monetary policy. Current FOMC projections and market expectations point to a series of rate cuts beginning in late 2024, with the federal funds rate expected to decline from current levels around 5.4% to approximately 3.6-3.9% by the end of 2025. Based on recent Fed communications and economic projections, the most likely scenario for January 2025 is either no change in rates or a 25 basis point cut, depending on the timing of the Fed's initial easing cycle. Key factors influencing this decision will include the path of inflation (expected to approach 2.2-2.4% by late 2024), unemployment rates (projected around 4.0-4.1%), and overall economic growth dynamics. More aggressive rate cuts appear unlikely given the Fed's historically cautious approach to policy changes.

Economic Background

Current Conditions

• Federal funds rate currently at 5.4% (as of late 2023)
• Core PCE inflation projected to decline to ~2.4% by end of 2024
• Unemployment rate stable around 4.0-4.1%
• GDP growth moderating but positive (1.8-2.1% projected for 2024)

Fed Policy Trajectory

• FOMC projections indicate rate cuts beginning in late 2024
• Target federal funds rate of 3.6-3.9% by end of 2025
• Gradual approach expected with 25bp cuts as standard increment

Outcome Analysis

No Change (64.5% market probability)

• Most conservative outcome aligned with Fed's careful approach
• Provides flexibility to assess impact of earlier cuts
• Likely if inflation remains above target or growth stays robust

25bp Cut (29.0% market probability)

• Second most likely scenario
• Consistent with gradual easing cycle
• Would follow expected initial cuts in late 2024

50bp Cut (5.5% market probability)

• Would require significant economic deterioration
• Inconsistent with Fed's recent communication
• Low probability unless sharp downturn emerges

75+bp Cut (1.1% market probability)

• Emergency scenario only
• Would require severe economic stress
• Extremely unlikely given current projections

25+bp Increase (1.1% market probability)

• Counter to current policy trajectory
• Would require significant inflation resurgence
• Highly unlikely given economic projections

Key Factors to Watch

1. Inflation Metrics

   • Core PCE trends
   • Wage growth dynamics
   • Housing costs

2. Labor Market

   • Unemployment rate
   • Job creation
   • Labor force participation

3. Economic Growth

   • GDP readings
   • Consumer spending
   • Business investment

4. Financial Conditions

   • Market stability
   • Credit conditions
   • Global economic factors

Recent Developments

• Fed projections from March 2024 show continued confidence in disinflation
• Market expectations align with gradual easing cycle
• Economic data suggests soft landing scenario more likely