The Federal Reserve is poised to hold its first policy meeting of the year on January 28 and 29, where it is anticipated to maintain current interest rates following three cuts since September 2024.
The Fed's dual mandate focuses on sustaining a 2% inflation rate and maximizing employment. After a significant rise in inflation in 2022, the Fed raised the federal funds rate from 0.1% to 5.33% between March 2022 and August 2023. This aggressive approach has led to a decrease in the Consumer Price Index (CPI) to 4.1% in 2023, although recent trends show a rise to 2.9% in December.
In the latest Summary of Economic Projections, the Federal Open Market Committee (FOMC) reduced its forecast for interest rate cuts in 2025 from five to two, reflecting an improved GDP growth projection from 1.8% to 2.2% and an increase in PCE inflation expectations from 2.1% to 2.5%.
Market reactions indicate cautious sentiment, with traders predicting only one rate cut in 2025, expected in June. Historically, lower interest rates have been beneficial for stock markets, promoting corporate borrowing and growth. However, past rate-cutting cycles have often coincided with economic downturns, causing temporary declines in the S&P 500.
Despite the current economic indicators, the rise in unemployment from 3.7% to 4.1% in 2024 may signal potential challenges ahead. Investors are advised to remain vigilant as market conditions evolve.