Powell’s Fed Signals: Rate Cut, Inflation Goals, and What’s Next for Gold and Stocks.

An Early Look at the Fed’s December Decision: What to Watch Before the Holidays

As traders prepare for the Christmas and New Year holiday season, next week’s Federal Reserve meeting stands as the year’s final major market event. On December 18, 2024, the Fed is widely expected to cut interest rates by 25 basis points (bp), marking its fourth reduction this year.

While the rate cut itself seems a near certainty, the focus will shift to the Fed’s 2025 projections, where uncertainty looms. With inflation proving stubborn and labor markets resilient, the central bank is likely to strike a cautious tone, setting the stage for market reactions in Treasury yields, the U.S. Dollar, gold, and equities.

How Will Inflation Shape the Fed’s Tone?

Recent inflation data has added complexity to the Fed’s outlook. The Consumer Price Index (CPI) remains uncomfortably high, with core inflation registering consistent 0.3% monthly gains—too elevated for comfort.

Meanwhile, cooling housing costs and an expected softening in November’s Personal Consumption Expenditures (PCE) Price Index, due December 20, suggest progress toward disinflation. These mixed signals leave the Fed balancing its dual mandate of stable prices and maximum employment, making it likely to signal a cautious easing path for 2025, with only limited cuts on the table.

Will the Fed Scale Back Rate Cut Expectations?

Markets have priced in the December rate cut, but future reductions remain less certain. Futures contracts currently suggest three 25bp cuts in 2025, though Fed Chair Jerome Powell may temper expectations during his post-meeting press conference.

A more hawkish tone is likely as the central bank factors in President-elect Trump’s pro-growth policies, including tax cuts and tariffs, which could sustain consumer demand and complicate inflation control efforts. The Fed’s updated economic forecasts may show policymakers reluctant to cut aggressively, emphasizing a slower, shallower easing trajectory.

How Will Treasury Yields and the Dollar Respond?

A cautious Fed stance could stabilize Treasury yields, particularly on the short end, which has already priced in the December cut. The 10-year yield may remain range-bound as traders assess longer-term risks.

Meanwhile, the U.S. Dollar might find support from any hawkish surprises, as limited easing could reinforce its relative strength against peers, especially if global central banks lean dovish.

Could Gold and Stocks Benefit?

Gold faces mixed prospects. A hawkish Fed would pressure gold via higher yields and a firmer dollar, but dovish surprises could reignite its appeal as a hedge against inflation and uncertainty.

Equities, particularly in rate-sensitive sectors like tech, may see some upside from the December cut, though a cautious Fed tone might cap gains as investors weigh slower growth against easing financial conditions.

What’s the Fed’s Message for Markets Heading into 2025?

As the Fed wraps up its December meeting, traders should anticipate a 25bp rate cut alongside signals of a more restrained easing cycle for 2025. This cautious stance suggests a neutral to slightly bearish outlook for bonds and gold, while equities might enjoy modest near-term support. With inflation and future policy clarity remaining pivotal, Chair Powell’s remarks will offer essential insights for navigating the markets into the holiday season and the new year.

More Information in our Economic Calendar.