25-bp rate cut likely; markets await 2025 cues: Analysts

The Federal Open Market Committee (FOMC) is scheduled to meet today, Dec. 18, to announce its decision on interest rates and monetary policy, marking the Federal Reserve's final meeting of 2024.

Market consensus widely anticipates a 25-basis-point (bp) rate cut during today’s meeting.

This meeting comes against the backdrop of the escalating geopolitical and economic challenges, as global markets seek insights into the Fed’s monetary policy direction for 2025. It also coincides with expected political changes, as Donald Trump is set to assume the US presidency next month.

Analysts surveyed by Argaam suggest that the Fed is likely to proceed with a 25-bp rate cut, reflecting its ongoing efforts to support the economy in an increasingly uncertain global environment.

Is a rate cut in the cards?

Saad Al-Thaqfan, an economic analyst and a board member of the Saudi Economic Association (SEA), expects a 25-bp rate cut, citing stable inflation near the 2% target, a slowdown in the labor market, and the negative economic impact of high interest rates.

Meanwhile, Walid Elhelw, CEO of EL7 Consulting, noted that the anticipated 25-bp reduction might be a "hawkish cut," under which the Fed could raise growth expectations and reduce unemployment while keeping inflation slightly elevated.

He added that recent inflation figures are reassuring for the Fed, indicating that the risks have shifted from inflation to unemployment, as predicted by more than two-thirds of Fed members in the last quarterly meeting.

Elhelw explained that Fed Chairman Jerome Powell may refrain from providing a clear roadmap for the future of monetary policy during the post-meeting press conference, leaving interest rate decisions dependent on market developments.

Wael Makarem, Senior Market Strategist for the MENA region at Exness, projects the Fed to reduce interest rates by a 0.25 percentage point in today's meeting, bringing the rate range to 4.25%-4.50%.

He pointed out that this rate cut is fully priced in by markets as inflation approaches the target range. This is despite recent readings that do not align with the Fed's expectations, alongside a gradual decline in the labor market, in line with market predictions.

However, Makarem noted that the Fed may adopt a cautious approach to future rate cuts, focusing on economic data, the dot plot, and the potential impacts of political changes under the new US administration.

He added that the results of the meeting, updated economic forecasts, and Powell statements will be crucial in shaping market outlook for monetary policy in 2025 and beyond.

Impact on markets: What will happen to stocks and commodities?

Al-Thaqfan confirmed that a 25-bp rate cut is likely already priced in and thus would not surprise investors. However, if the rate cut exceeds expectations, it could have a positive impact on financial markets, as well as on oil and gold prices. On the other hand, keeping rates unchanged does not bode well for these markets.

Makarem added that the key driver for markets will not only be the rate cut decision but also the Federal Reserve’s guidance for 2025.

If the Fed’s tone is more cautious and its rate cut forecasts are lower than anticipated, stocks may decline, with continued strength in the US dollar and additional pressure on gold and oil due to rising bond yields, he added.

Rate cut expectations for 2025: A new cycle?

Al-Thaqfan explained that expectations suggest three to four rate cuts next year, each by 25 bps, as the labor market improves, and inflation stabilizes.

Elhelw, on the other hand, believes markets can absorb only three rate cuts in the coming year, compared to previous projections of four cuts.

Meanwhile, Makarem predicted that the Fed may temporarily pause rate cuts in January 2025 to assess economic data as well as the political and economic changes under the new US administration.

He noted that the current market outlook aligns with the Fed’s strategy to implement limited rate cuts in 2025 while continuing to monitor inflation, which remains above the target rate.

He pointed out that the Fed’s decisions will continue to be influenced by inflation trends, employment data, and economic growth, with political shifts under the new administration posing challenges for the US central bank in the coming year.