The SEP forecasts in the 18th Dec Fed meeting are likely to evolve in a hawkish direction, with growth upgraded, inflation revised higher and unemployment lower. These forecasts are likely to be closer to the June SEP than September, and the former anticipated only 25bps of total reductions this year versus the 100bps the Committee ultimately delivered. In this context, wouldn’t data dependence have justified skipping a rate reduction at this meeting? Though this is what the Fed should have done ideally but seeing the current market pricing and no pushback in the silent period, we grudgingly accept the 25-bps cut in the Dec meeting. But this might be followed by hawkish DOTS as well as a non dovish Fed Chair Powell in the press conference. We would not be surprised to see the median long-run growth expectation inch up to 1.9% or even 2%. These positive supply-dynamics could also lead to a continued upward migration in long-run fed funds rate estimates, which has been a greater focus of Fedspeak since the November meeting. In summary, the latest SEP should reflect a slower pace of policy normalization amidst a modest upward reassessment of longer-term growth and nominal neutral rate expectations. The upshot of these forecast revisions will likely be an expectation for 75bps of rate cuts next year – 25bps less than was anticipated in September – which we expect to carry over into 2026 and 2027. We also expect an upward skew to the dots, with more officials expecting less than three cuts than more. (our view on what the Fed should do rather than what the DOTS would show). We see Jan meeting a clear skip and then a likely cut in March dependent upon CPI evolution as well as incoming new administration policies. Importantly, should inflation not slow again by late winter, there is a good case that the Committee will deliver even fewer cuts than they will project next week. We expect the FOMC to engage in a renewed debate about the Fed’s balance sheet early in the new year but have nothing to report next week. We expect QT taper to begin by June’25 only.
