The Federal Reserve announced this week that it will lower the benchmark interest rate by 25 basis points, aligning with market expectations. However, according to the latest dot plot, policymakers anticipate only two rate cuts in 2025, down from the four cuts predicted in September.
Federal Reserve Chairman Jerome Powell stated after the policy meeting that the Fed is currently approaching a point where the pace of rate cuts might slow and that future rate policies will be determined by economic data. However, the upcoming annual rotation of voting members at the Federal Open Market Committee (FOMC) may introduce more resistance to rate cuts.
According to the Fed's voting rules, aside from the seven fixed-vote Fed governors and the New York Fed president, the other 11 regional Fed presidents rotate four voting rights each year. In next year's rotation, the hawkish St. Louis Fed President James Bullard and Kansas City Fed President Esther George will replace relatively neutral Atlanta Fed President Raphael Bostic and San Francisco Fed President Mary Daly. Additionally, Cleveland Fed President Loretta Mester—who opposed rate cuts at this meeting—will be replaced by the dovish Chicago Fed President Charles Evans.
TD Securities analyst Oscar Munoz pointed out that with the addition of more hawkish voting members, there might be more votes against rate cuts next year. Bullard and George tend to prioritize controlling inflation over aggressive policy easing, which could constrain the Fed's overall rate-cutting path.
In the rate cut decision on Wednesday, four out of nineteen policymakers dissented, with Mester directly voting against it. Analysts believe this indicates growing internal disagreement within the Fed on the future direction of monetary policy, adding uncertainty to the interest rate path in 2025.
Additionally, another challenge the Fed might face next year is the complexity of economic data. Although the job market currently appears robust, inflation rates and other key indicators could influence the Fed's decisions. Overall, the hawkish tendencies of new voting members add more variables to the Fed's future monetary policy.
