What to Expect from the December 2024 Fed Rate Cut

All eyes are turned towards the Federal Reserve’s upcoming meeting on December 19, 2024, at 12:30 PM IST. A 25-basis point (bps) rate cut is anticipated to happen, making it the third consecutive reduction in fed interest rates for the year, lowering the benchmark federal funds rate to a range of 4.25% to 4.50%. 

While this outcome is largely expected and already factored into current market prices, the Fed’s updated economic projections for 2025 will be a key factor influencing investor sentiment and market trends moving forward.

The Baseline Expectation

Market participants widely expect the Federal Reserve to announce a 25 bps rate cut during this meeting. This expectation is based on a combination of recent economic data and the Fed’s previous communications.

A moderate increase in market indices is expected following the announcement, as traders react positively to the continued easing of monetary policy.

ALSO READ: Why do Fed Rate Cuts Impact Crypto?

Why Projections Matter

Since the Fed’s last meeting in November, several key economic indicators have emerged that could influence future rate decisions:

• Inflation Trends: The Consumer Price Index (CPI) has shown an upward drift, rising from 2.4% in September to 2.8% in November. This increase raises concerns about persistent inflation, which could influence the Fed’s approach to further rate reductions.
  
• Growth Metrics: On a positive note, growth indicators remain firm. Job additions have rebounded strongly, jobless claims are at low levels, and PMIs (Purchasing Managers’ Index) indicate solid economic activity. These factors contribute to a more complex economic landscape that the Fed must navigate.

Given these developments, the Fed’s projections for 2025 have become less certain. At its September meeting, the “dot plot” indicated expectations for four rate cuts in 2025, but market sentiment now suggests that this number may be revised down to three, or even just two cuts.

Key Context for Rate Decisions

The shifting expectations regarding future rate cuts are critical for understanding how markets might react:

• If the Fed signals fewer cuts than previously anticipated, it could create modest negative sentiment in the markets. However, as long as the cutting cycle continues, this impact may be limited.
• A more concerning scenario would be if the Fed opts for a “pause”—an outright cessation of rate cuts—which would likely lead to significant market turbulence.

The Decision Matrix for Tomorrow

The outcomes of tomorrow’s meeting can be categorized into three potential scenarios:

1. Neutral (Expected Scenario)

• Outcome: A 25 bps cut with projections showing three rate cuts in 2025.
• Market Reaction:
  • A small relief rally is expected.
  • Technology stocks may slightly outperform cyclical sectors.
  • The 10-year Treasury yield may drift modestly higher.
  • The Dollar Index could rise, potentially surpassing 107.

2. Dovish Scenario (Positive)

• Outcome: A 25 bps cut with projections indicating four rate cuts in 2025.
• Market Reaction:
  • A solid rally is likely, with new highs possible across major indices.
  • Cyclical sectors such as financials and industrials would likely lead gains.
  • The 10-year yield could drop below 4.30%.
  • The Dollar Index may decrease by approximately 1%, benefiting commodities like gold.

3. Hawkish Scenario (Negative)

• Outcome: No cut or projections showing fewer than three cuts in 2025.
• Market Reaction:
  • A solid drop across equity markets is anticipated.
  • Treasury yields could spike significantly, with the 10-year yield exceeding 4.50%.
  • The Dollar Index may surge beyond 107, moving toward 108.
  • All S&P sectors would likely decline, although defensives and large-cap tech might outperform.

Why Hawkish Sentiment Could Hurt Markets

If the Fed indicates a more hawkish stance than expected—suggesting that inflation is hotter and growth is stickier—markets could react negatively. Investors might worry about sustained inflation pressures leading to higher interest rates for longer periods. In such a scenario, Treasury yields would likely rise while stock prices fall broadly, particularly impacting cyclical stocks that are sensitive to interest rates.

Inflation & Growth Metrics to Watch

As we approach this pivotal meeting, several key metrics will be closely monitored:

• Inflation: The CPI’s recent increase from 2.4% to 2.8% raises concerns about persistent inflationary pressures that could influence future monetary policy decisions.
• Growth Indicators: Strong job data and resilient PMIs suggest that while inflation is rising, the economy remains robust—creating a complex backdrop for monetary policy.

If these trends persist into early 2025, there is a real risk that fewer rate cuts or even a pause becomes a central theme in discussions surrounding monetary policy.

Potential Impact on Bitcoin and Cryptocurrency Markets

The cryptocurrency market is particularly sensitive to changes in monetary policy due to its speculative nature and reliance on liquidity conditions. Here’s how Bitcoin and other cryptocurrencies might react following the Fed’s decision:

1. Positive Market Sentiment (Dovish Scenario):
   • Should the Fed adopt a dovish stance with more aggressive rate cuts projected for 2025, we can expect increased liquidity in financial markets. This environment tends to favor risk assets, including cryptocurrencies like Bitcoin.
   • Historically, when interest rates are low and liquidity is high, investors often seek alternative investments such as cryptocurrencies for higher returns. This could lead to significant upward price movements in Bitcoin and altcoins.
2. Neutral Market Sentiment (Expected Scenario):
   • If the Fed announces only a modest cut and maintains projections for three cuts in 2025, we may see a mixed reaction in crypto markets. While some investors might welcome any form of easing, others may remain cautious due to ongoing inflation concerns.
   • Bitcoin could experience slight volatility but may not see substantial gains or losses as traders digest the implications of this decision alongside broader market sentiments.
3. Negative Market Sentiment (Hawkish Scenario):
   • In contrast, if the Fed adopts a hawkish stance—indicating fewer cuts or even pausing altogether—this could trigger panic selling across risk assets including cryptocurrencies.
   • Higher interest rates typically strengthen fiat currencies like the US Dollar while making borrowing more expensive; thus reducing investor appetite for riskier assets like Bitcoin. In such scenarios, we can expect downward pressure on cryptocurrency prices.

Conclusion

Tomorrow’s Federal Reserve meeting is not just about announcing an expected rate cut—it represents a critical juncture regarding how committed the Fed remains to its easing cycle amid evolving economic conditions.

• More cuts would generally bode well for stocks and bonds as liquidity remains high.
• Conversely, fewer cuts than anticipated could lead to significant adjustments in market expectations and investor sentiment.

As investors prepare for potential volatility following this meeting, understanding these dynamics will be essential for navigating what lies ahead in both equity and fixed-income markets—and importantly within cryptocurrency markets as well. 

With an eye on inflation and growth metrics alongside potential shifts in monetary policy direction from the Fed, market participants will need to stay agile and informed as they respond to whatever direction the Fed chooses to take.