As the clock ticks down to the Federal Reserve's two-day monetary policy meeting set to commence on the 17th in Washington, anticipation runs high among investors and economists alikeThe decisions made during this gathering can send ripples through the financial markets, impacting the global economy.

Leading experts predict that the Federal Open Market Committee (FOMC) will approve a rate cut of 25 basis points this time aroundYet, what lies ahead on the policy path for next year remains obscured by uncertaintyAmong the most scrutinized elements will be the latest iteration of the Summary of Economic Projections (SEP), the updated dot plot indicating members' expectations for future interest rates, and key insights from Federal Reserve Chairman Jerome Powell regarding the prospect of further rate reductions.

In recent months, the intricacies of the dual mandate of the Federal Reserve—namely price stability and maximum employment—have been tested

The winds of inflation have not blown favorably since the previous meeting, as signs emerge within the markets, hinting that the Fed's steadfast goal of steering inflation down to the target rate of 2% may face challengesThis is exemplified by the latest consumer price index (CPI) data which reported a monthly increase of 0.3% for November, the most pronounced rise in seven months, with a year-over-year inflation rate climbing to 2.7%. Additionally, the New York Fed's consumer survey revealed that one-year inflation expectations surged to 3.0%—a stark reminder of the realities policies must address.

On the employment front, while the job market showed resilience despite disruptions from labor strikes and adverse weather earlier in the fall, November’s unemployment rate ticked up to 4.2%. Over the past six months, the average monthly job growth has stalled below 150,000, a pace that some policymakers argue does not adequately match the needs of the growing labor force.

The forthcoming quarterly projections will offer a fresh batch of forecasts from the Fed regarding the economy, inflation, unemployment, and interest rates—elements that will likely shape the trajectory of future monetary policy

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According to Bob Schwartz, a senior economist at Oxford Economics, the Fed grapples with the challenge of navigating inflation’s weakened momentum towards the 2% target, even while the economy shows no clear signs of slowing down.

Schwartz remains cautiously optimistic, suggesting that various factors mitigate the potential for a significant inflation spikeHe notes that the labor market is in relative equilibrium, with nominal wage growth aligning with the Fed’s inflation goals, alongside a robust trend in productivity that serves to contain inflationary pressuresFurthermore, there are early signs that inflation in the services sector may be coolingRecent data fluctuations could also be influenced by seasonal variations and base effects.

A report from Wells Fargo indicates that the Federal Reserve's upcoming predictions will likely reveal a better-than-expected outlook for the U.S

economyThey expect revisions to the median forecast for real GDP growth in 2025 and 2026 to show increases of 0.1 to 0.2 percentage points, while the unemployment rate forecast may drop by 0.1 percentage pointsHowever, given a backdrop of heightened price pressures, inflation forecasts for 2025 and 2026 are projected to see an upward revision, also by 0.1 to 0.2 percentage points.

In terms of interest rates, the median forecast is likely to reflect a cautious attitude by the Fed towards further rate cutsDanske Bank anticipates that by the end of 2025, the median federal funds rate could rise by 25 basis points to 3.625%. There exists a potential for a more dramatic upward adjustment of 50 basis points, especially in light of recently released data and comments from some FOMC members.

Perhaps drawing more attention than the median rate predictions will be the distribution of the dot plot, which illustrates the divergences within the committee’s views

The previous September forecast illustrated a clustering of rate predictions for 2025 primarily between 3.00%-3.25% and 3.25%-3.50%, with six committee members in support of each range.

The tone of Powell’s statements during this meeting will undoubtedly be a focal point for market observersFollowing the release of November's manufacturing purchasing managers' index (PMI) and non-farm payroll reports, the Atlanta Fed’s GDPNow model projects a robust growth rate of 3.3% for the fourth quarter, a significant uplift from the 2.8% recorded in the previous quarter.

Discussions within the Federal Reserve regarding a pause in rate cuts may have emerged recentlyPowell, in a recent public address, indicated that a strong U.Seconomy allows the FOMC to approach the process of reducing rates with a “more measured” stanceSchwartz noted that it would be reasonable for the Fed to retain its descriptions of the current economic conditions without necessitating revisions, continuing to regard the balance of employment and inflation targets as “roughly aligned.”

Political shifts, particularly with the Republicans gaining significant influence in Congress and upcoming policy changes under a new administration, add another layer of complexity

Market reflections suggest that participants are bracing for only two rate cuts by the Fed in the forthcoming yearViews among Wall Street analysts vary widely, with Bank of America anticipating three rate cuts in the first half of the year, while Nomura believes there will be only one rate cut next year, with two further cuts in 2026.

Interestingly, a number of Federal Reserve officials have adopted a more hawkish tone in recent weeksFor instance, Chicago Fed’s Goolsbee expressed expectations of approaching the end of the rate-cut cycle more quickly next yearCleveland Fed President Beth Hammack asserted that, while rates should gradually decrease, given the persistent inflationary environment and a healthy labor market, there may be a need to decelerate the pace of rate reductions.

Danske Bank posits that although Powell may aim to project a neutral stance in his forthcoming remarks, he may still leave the door open for a slower approach to monetary easing

The market's pricing for the January meeting currently indicates a modest 6 basis point change, anticipating that substantial shifts in market expectations are unlikely to occur post-meeting.

Wells Fargo anticipates that the Fed will maintain a restrictive tone regarding monetary policy and highlight the continued importance of being data-driven in future policy decisions, indicating that no predetermined trajectory is in place, but rather decisions will be made progressively based on new information.

Another potential highlight of the meeting could be the overnight reverse repurchase agreement (ON RRP) rate adjustmentRecent minutes revealed some policymakers are considering a "technical adjustment" to the ON RRP offering rate to align more closely with the bottom end of the federal funds rate target range.

ON RRP plays a crucial role in the Fed's short-term rate composition, alongside the interest on excess reserves (IOER) and the federal funds rate (FFR), typically serving as the lower boundary of the funds rate corridor