Here's what to expect from the upcoming Fed meeting

What happened? 

The Federal Open Market Committee (FOMC) is holding its final meeting of the year from 17-18 December 2024. 

The interest rate decisions set by the US Federal Reserve (Fed), is among the most watched, if not the most watched monetary policy decision by a central bank globally, with significant implications for monetary policy and financial markets around the world. 

The policy decision will be released at 2.00pm Eastern Time on 18 December 2024 in the United States (3am Singapore time on 19 December 2024), with a press conference held by the Chair of the Federal Reserve, currently Jerome Powell, scheduled for 2.30pm (3.30am Singapore time on 19 December 2024) on the same day. 

What is the current market expectation for the upcoming Federal Reserve meeting?

It is widely anticipated that the Fed will lower the federal funds rate by 25 basis points (bps), from the current target range of 450-475 bps to 425-450 bps. 

The likelihood of a 25 bps interest rate cut in the Federal Reserve meeting on 18 December 2024 is 96%, according to CME Fedwatch Tool as of 14 December 2024. The CME FedWatch tool forecasts rate movements based on fed funds futures trading data. 

Inflation in the US continues to be a concern, as the Consumer Price Index (CPI) annual inflation rate rose for a second month in a row, from 2.6% in October 2024 to 2.7% in November 2024. 

Importantly, this is still above the Fed’s goal of 2%.

That said, the labour market in the US has been cooling, and the Fed could be concerned about the impact of labour market conditions on aggregate demand growth in the future. 

In November 2024, US employers added 227,000 jobs, a rebound from a hurricane-impacted slowdown in October, but the unemployment rate rose to 4.2%. 

This likely reinforced the expectations for a Fed rate cut in December 2024. 

What else to look out for at the Fed meeting?

The Federal Reserve's mandate is to promote maximum employment and stable prices. 

The press conference to be held by Fed Chair Jerome Powell, could give indications of the FOMC’s assessment of the economic outlook for 2025, and consequently the direction of future interest rate movements in the US in 2025. 

The FOMC participants' views on the current macroeconomic conditions, and their forecasts for economic indicators such as GDP growth and unemployment rates will also be released as part of the “Summary of Economic Projections”. 

More importantly, each FOMC participant will also provide his or her assessment of the appropriate monetary policy, including a path for the federal funds rate and its longer-run value. 

This is also more well known as the Fed’s “Dot Plot”, which charts out a summary of how the Fed as a whole sees interest rates in the US evolving over the course of 2025. Each “Dot” represents the projections by a Fed official. 

How many further rate cuts are expected in 2025?

According to the CME Fedwatch Tool as of 14 December 2024, there is a clear 96.0% probability of a 25 bps rate cut at the upcoming 18 December 2024 FOMC meeting.

However, the outlook for the fed funds rate is less certain in 2025, with a 52.0% probability of a 25 bps rate cut in March 2025, and a 33.5% probability of another 25 bps rate cut in September 2025. 

Overall, this would imply only two 25 bps rate cuts in 2025. 

Recap of the last Fed meeting

At the November 2024 meeting, the Fed lowered rates by 25 bps as: “The Committee judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate”. 

This comes right after a 50 bps cut at the preceding FOMC meeting on 18 September, which marked the start of a rate cut cycle. 

What else will we track?

The Fed Funds Rate is the rate at which commercial banks borrow and lend their excess reserves to each other overnight, and represents a key benchmark for short term interest rates in the economy. 

The fed funds rate is thus a key benchmark for short term borrowing costs for individuals and corporates taking out a loan with the banks. 

However, we will also be tracking the US 10-year Treasury yields, and also the Singapore 10-year Government bond yields, as an indicator of longer term rates in the economy. 

The 10-year Government bond yields are also influenced by other factors such as investors’ expectations for economic growth, future inflation, geopolitical risks and the demand for ‘safe haven’ assets, among others. 

The Fed has been lowering interest rates since September 2024.  However, recent positive economic data in the US suggests the Fed may not need to cut rates as aggressively in 2025 in a "higher for longer" interest rate scenario. 

This comes as markets assess inflation risks under the new US administration, with President-elect Trump set to take office in January 2025.

What does this mean for Singapore investors?

In line with the lower fed funds rate in the US, the Singapore Overnight Rate Average (SORA) has been trending down since September this year. 

SORA is the volume-weighted average rate of borrowing transactions in the unsecured overnight interbank SGD cash market in Singapore, and is a key benchmark for borrowing rates in Singapore. 

With the Fed widely expected to lower rates by 25 bps next week, REITs with a (i) high gearing, (ii) a high weighted average cost of debt, (iii) low proportion of fixed rate debt and (iv) significant refinancing in 2025 and 2026 may benefit disproportionately from lower interest rates in the future. 

While these REITs could benefit from lower interest rates, we would also consider their ability to grow net property income, particularly given the mixed sector fundamentals we highlighted in our earlier report, “Renewed Headwinds from Higher Bond Yields”

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