December’s meeting of the FOMC proved somewhat more hawkish than investors expected, and market pricing now sees the federal funds interest rate at 4% by the end of 2025. This follows something of a roller coaster year, with expectations peaking at over 4% in April before dropping below 3% in August, when increasing signs of labour market weakness were the primary concern. Now, with sticky inflation and continued job market gains, committee members have moved their focus to the inflation side of their dual mandate. In the meeting that finished on December 18, the median voter upgraded their view (relative to September) of core PCE inflation by 0.2 percentage points in 2024, 0.3 percentage points in 2025 and 0.2 percentage points in 2026. Despite this persistent inflation overshoot compared with their target of around 2%, members see rates being cut to 3.4% by 2026. We at Fathom see upside risks to that forecast, penciling in a fed funds rate of 4.25% by end-2026. Labour market outturns, and the precise policy mix that the incoming Trump administration implements, will both be critical to developments that could change that.
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