December FOMC preview_ Confident today, cautious tomorrow

Industry/Company Involved - Industry: Financial Services, specifically focusing on the Federal Reserve's monetary policy and its impact on the economy. - Company: Not explicitly mentioned, but the analysis is centered around the Federal Reserve's actions and projections. Key Points and Arguments - Fed Rate Cut Expectation: The Federal Reserve is expected to cut its target policy range by another 25bp to 4.25-4.50% in December, bringing the cumulative reduction to 100bp since the easing cycle began in September [17]. - Inflation Trends: Inflation is projected to continue on a downward trajectory, with the median of the dot plot projecting four 25bp rate cuts in 2025 and one 25bp rate cut in 2026 [17]. - Labor Market: The labor market has cooled but remains stable, suggesting it is not weak enough to justify a larger easing of policy [19]. - CPI Inflation: The November CPI report showed further deceleration in housing-related inflation, particularly in shelter inflation [20]. - FOMC Statement: The FOMC statement is expected to remain unchanged, reflecting the expected 25bp reduction in the target range for the federal funds rate [32]. - Economic Projections: The updated Summary of Economic Projections (SEPs) show stronger growth in 2024, slower disinflation in 2025 and 2026, and fewer rate cuts in the appropriate policy path [44]. - Rate Cut Projections: The median member is expected to project 100bp of rate cuts in 2025 for a median policy rate of 3.4%, and only 25bp of further easing in 2026 to 3.1% [57]. - Risks: Risks skew in the direction of fewer cuts, including concerns about inflation, restrictive trade and immigration policies, and upward revisions to the longer run neutral rate [60]. - Press Conference Expectations: Chair Powell is expected to express confidence in disinflation and signal caution in moving to a neutral policy stance [82]. - Balance Sheet Policies: The ON RRP rate is expected to be reduced by 5bp, but no clear signal on the end of quantitative tightening (QT) [86]. Other Important Points - The Federal Reserve's balance sheet has contracted from $8.9tn to$6.9tn since the start of quantitative tightening (QT) in June 2022 [87]. - The Fed's goal is to return to an "ample reserves" regime, where day-to-day fluctuations in liquidity demand do not show through to money market rates [102]. - The Fed could stop its balance sheet runoff with a slightly larger buffer for risk management reasons, or engage in temporary operations to smooth out the volatility in reserve balances [113].