The question on most investors’ minds is what actions the Federal Open Market Committee (FOMC) – the policy-making arm of the Federal Reserve (Fed) - will take in 2025. It is important to understand who the Federal Reserve is, their purpose for the U.S. economy, and what analysts believe will drive their policy decisions in 2025.
There are 3 main entities within the Fed – the Federal Reserve Board of Governors, the 12 Federal Reserve banks, and the Federal Open Market Committee (FOMC). The Board of Governors is comprised of 7 members, or governors, who are nominated by the President of the United States and confirmed by the United States Senate. Their chief roles are to oversee the operation of the Federal Reserve System and fulfill the duties and responsibilities set forth in its creation document, the Federal Reserve Act of 1913.
The FOMC is a 12-member group of officials from around the Fed system that set U.S. monetary policy at Fed meetings held 8 times per year, 4 of which sees the release of its Summary of Economic Projections - a summary of the FOMC’s voting members’ projections for inflation, interest rates, unemployment, and GDP growth. Members include the 7 members of the Board of Governors, the president of the Federal Reserve Bank of NY and 4 of the remaining 11 Federal Reserve bank presidents on a rotating basis. Monetary policy, which affects interest rates and credit conditions, can have wide-sweeping effects on financial conditions throughout the economy. The Fed’s setting of monetary policy influences short-term interest rates and overall financial strength throughout the economy, something that has been front and center since the Fed began its rate hiking campaign in early 2022. The FOMC is also responsible for enacting open market operations – selling or purchasing government securities (e.g., Treasury bills) in the open market to reduce or increase the money supply in the economy.
As we reach the end of 2024, the FOMC continues to develop U.S. monetary policy as inflation recedes. So far this year, the Fed has lowered interest rates at their September and November meetings by 50 and 25 basis points, respectively. With the Fed’s December being held on the 17th and 18th, CME FedWatch Tool, who analyzes the probabilities of fed fund rate changes based on interest rate trader actions, estimates 62% chance that the Fed will reduce interest rates another 25 basis points. But what is the Fed planning for 2025?
Analysts have suggested that inflation and the level of unemployment will be the catalysts for determining the frequency and amount of rate cuts in 2025. At its peak, inflation, as measured by the Consumer Price Index (CPI), reached 9.1% for the 12 months ending in June 2022. The most recent CPI reading, for the 12 months ending in September 2024, showed inflation at a much improved 2.4%. While FOMC members anticipate continued fed fund rate cuts into 2025, Fed Chair Jerome Powell said after November’s meeting that “We are not on any preset course. We will continue to make our decisions, meeting by meeting.” He noted that the Fed would “carefully assess incoming data, the evolving outlook and the balance of risks.”