The Federal Reserve enters its final policy meeting of 2024 with markets nearly certain of action. Traders assign a 92% probability to a rate hike at the upcoming decision, with a 75% chance of a second increase in December, according to CME FedWatch data cited by CNBC.
This pricing reflects persistent inflation concerns and economic resilience that has forced the Fed to pause its rate-cutting cycle. The central bank cut rates three times in 2024, bringing the federal funds rate to the 4.25% to 4.50% range. But recent data on wage growth, services inflation, and consumer spending have spooked markets into expecting the Fed to reverse course.
The timing matters for incoming Trump administration officials. Christopher Waller, a Fed governor and potential chair candidate, faces scrutiny over his inflation-fighting record at a moment when price pressures remain sticky. His recent confirmation battle and policy positions have drawn attention from both hawks and doves on the monetary policy spectrum.
The economic backdrop has shifted since September. While the labor market has cooled, it remains resilient with unemployment near 4%. Core PCE inflation, the Fed's preferred gauge, sits above the 2% target. Services inflation has proven particularly stubborn, limiting the Fed's room to cut rates further without risking a rebound in price growth.
Traders are factoring in two potential outcomes. The baseline scenario assumes a 75-basis-point increase across the two final meetings of 2024, returning the fed funds rate to roughly 4.75% to 5.00%. This represents a sharp reversal from the easing cycle that began in September. The alternative pricing suggests the Fed stays put, but markets assign this outcome only 25% odds.
The market's conviction on rate hikes has hardened in recent weeks. Weak employment data initially sparked expectations for pause or cuts, but stronger-than-expected inflation reports and robust consumer spending reversed that narrative. October's PCE report and retail sales figures reignited recession fears while simultaneously cementing expectations for tighter monetary policy.
For investors, the shift carries direct implications. Higher rates reduce the present value of future corporate earnings and weigh on high-growth, low-yield sectors. Technology stocks, which have rallied on AI enthusiasm and lower rate expectations, face headwinds if the Fed tightens further. Bond yields have repriced higher, offering more attractive returns to fixed-income investors but creating mark-to-market losses for existing bondholders.
The real question for markets centers on forward guidance. The Fed's dot plot, showing policymakers' individual rate forecasts, will reveal how many hikes officials expect in 2025. This signals the terminal rate and the policy stance under new leadership. A hawkish projection could extend the tightening cycle into next year, while a dovish one might suggest December marks a temporary pause.
Warsh's involvement adds political complexity. His nomination or appointment to key roles depends partly on demonstrating orthodox inflation-fighting credentials while also signaling flexibility on growth concerns. The market pricing itself reflects this tension between inflation risk and economic slowdown.
Equity and fixed-income portfolios face a critical repricing risk if the Fed moves faster or further than expected. Conversely, weaker data could shift the 92% probability lower, rewarding investors positioned for cuts.