On December 19 (this Thursday) at midnight, the Federal Reserve will announce its decision from the December interest rate meeting. Despite the USA's November non-farm employment and inflation exceeding expectations, given the slight cooling of service inflation and the continuous rise in unemployment rate, a 25 basis point rate cut by the Federal Reserve in December has almost become a certainty.

The market still predicts that the Federal Reserve may lower rates further in 2025; however, there is great uncertainty regarding the specifics of the cut’s magnitude and pace. For the upcoming interest rate meeting, the focus is on Federal Reserve Chairman Powell's speech and the monetary policy forecast for 2025.

Some analysts believe that further rate cuts by the Federal Reserve in 2025 could have negative consequences. Yardeni Research states, 'The reason the Federal Reserve likely will not cut rates again early next year is not just because economic growth and inflation remain strong, but also because further cuts could exacerbate both.'

Apollo Global Management believes that 'the recent upward trend in inflation, coupled with strong economic momentum, suggests that inflation will rebound in 2025, which does not justify the Federal Reserve's rate cuts. The likelihood that the Federal Reserve may have to raise rates in 2025 is increasing.'

The Futures market agrees with this sentiment; according to the CME FedWatch tool, the possibility of a rate cut by the Federal Reserve in January next year is only 16%.

Many strategists believe that if the Federal Reserve continues to cut rates in 2025, it will further drive economic growth and stubborn inflation; however, for the stock market, the key determining factor is the trajectory of the USA's economic growth, not the magnitude of the rate cuts.

Investment banks like Morgan Stanley, JPMorgan, and Bank of America point out that companies strongly related to the USA's economy as well as defensive stocks, such as high-performing technology stocks, retail stocks, financial stocks, and utility stocks, may benefit.

Will there be a change in rate cuts in 2025? Federal Reserve officials collectively adopt a hawkish stance.

The Federal Reserve will start cutting interest rates in September 2024, with a major cut of 50 basis points for the first time, followed by another cut of 25 basis points in November, and this week's cut will mark the third consecutive reduction.

From the market's perspective, the Fed's interest rate cut this week seems to be a foregone conclusion, but within the Fed, if the economy continues to grow, the reasons for further rate cuts are less clear.

Some within the Federal Reserve have started signaling that before continuing to cut rates, they need to see more concrete evidence that inflation is improving or that the labor market is weakening.

Cleveland Fed President Beth Hammack stated earlier this month, 'We are at or nearing the stage of slowing the pace of rate cuts.' She favorably cited two instances from the 1990s when the Federal Reserve quickly lowered rates by a total of 75 basis points before shifting to a wait-and-see approach.

Some officials are also concerned that the exuberance for stocks and$Bitcoin (BTC.CC)$other speculative assets may further support entrenched inflation. Given recent economic activity, "it’s hard to think that current interest rates are restrictive," said Fed Governor Michelle Bowman in a speech earlier this month.

Dallas Fed President Lorie Logan warned against cutting rates too much, as she believes a more “normal” economic rate is much lower. She compared the situation to a captain whose depth sounder may mistake mud for water.

Do major Analysts think there will be a rate cut in January?

Considering initial inflation pressures and uncertainties in Trump's policies, Morgan Stanley's 2025 USA economic outlook states that the Federal Reserve remains cautious about the future rate path and will start to pause rate cuts in the second quarter of next year. As the economy slows, job growth is expected to nearly stall in the second half of 2026, at which point the Federal Reserve is anticipated to resume rate cuts.

Matthew Luzzetti, Chief US Economist at Deutsche Bank, expects the Federal Reserve to make its last rate cut of 25 basis points in December and then pause. The Analyst stated in an interview:

"I believe that when the Federal Reserve updates its economic outlook in December, the unemployment rate will be revised down, economic growth will be revised up, and inflation will also be revised up. Therefore, this dynamic definitely supports the Federal Reserve adopting a longer-term pause policy."

JPMorgan shares the same view, anticipating that Powell's speech or forward guidance will not undergo significant changes, although the bank still believes that the January meeting may be on pause.

"Economic forecasts will show better growth and stronger inflation this year, and the median of the interest rate dot plot will be adjusted to reflect three rate cuts next year, rather than four as indicated in the September dot plot."

UBS Group notes that the Federal Reserve is expected to cut rates by 25 basis points at the December FOMC meeting, then not cut rates in January, and resume rate cuts in March next year.

"Basically, they shift to once per quarter. We doubt this situation will persist for a long time. During the rate cuts from March 2025 to September 2025, we expect to see renewed fears of a labor market slowdown."

Of course, there are also large banks with different opinions, such as Goldman Sachs predicting earlier this month that the Federal Funds Rate of the Fed will drop to 3.25%-3.5% by the end of 2025 (currently at 4.5%-4.75%).

Goldman Sachs believes that the market has underestimated the extent of the Federal Reserve's interest rate cuts next year. Led by chief economist Jan Hatzius, Goldman Sachs analysts previously wrote: "If there is any distinction, it is the threat of tariffs dragging down economic growth in the near term, as well as the Federal Reserve leadership's continued inclination towards early policy normalization, which has boosted our confidence in consecutive rate cuts early next year."

Citigroup stated that the Fed's significant rate cuts this year have not yet ended and still expects a large cut of 50 basis points in December. Analyst Veronica Clark said, 'We see weakness in labor market dynamics across many different data points: low hiring rates, low resignation rates, and reduced new working hours... It truly feels like labor demand is quite weak.'

Strong economic growth is key to the U.S. stock market! Four categories of stocks may benefit.

The U.S. stock market has been soaring this year, with the S&P 500 Index expected to maintain a return rate of over 20% for two consecutive years. However, many strategists remain bullish on the U.S. stock market continuing to rise next year, including predictions from Goldman Sachs, Morgan Stanley, and Bank of America that the S&P 500 Index will rise to around 6600 points. These strategists believe that the backdrop of economic growth has always been the key driver of the stock market, rather than the extent of interest rate cuts.

A series of previously released economic data have shown that the overall economic performance of the USA slightly exceeded expectations. The market generally believes that the economy can remain stable even without rushing to cut interest rates. Powell mentioned in a recent speech: 'The current economic situation does not urgently require an immediate reduction in interest rates; the Federal Reserve has sufficient capability to respond cautiously.'

Therefore, even if the market faces the risk of the Fed pausing rate cuts, the optimistic economic outlook for the USA is likely to drive the stock market higher, particularly benefiting four categories of stocks closely associated with the U.S. economy: high-performing technology stocks, retail stocks, financial stocks, and utility stocks.

• High-performing technology stocks.

Morgan Stanley expects that AI investment will increase the USA's GDP by 0.1 percentage points in 2024, and by 2025, AI investment is anticipated to have a greater impact on economic growth, adding 0.25 percentage points.

Jefferies outlook for 2025, $Meta Platforms (META.US)$ 、 $Amazon (AMZN.US)$ 、$Snowflake (SNOW.US)$ and others are expected to continue to be profitable in the AI business:

Meta can further leverage generative AI to open new profit avenues outside of advertising through Llama and WhatsApp;

Amazon holds over 50% market share in the Cloud Computing Service provider market, which should bring "strong AI revenue potential" over time;

After bottoming out in 2024, Snowflake's business will reach a turning point in the fiscal year 2025, supported by strong order growth and increased contributions from AI for revenue growth.

• Retail Stocks

Barry Bannister, the chief investment strategist at investment bank Stifel, wrote in a report to clients last Thursday, "The current inflation environment seems unfavorable for a sustained stock market frenzy, and we lean toward defensive Industries."

Discount retailers $Costco (COST.US)$ are one of the bank's favorites, with the stock up about 51% this year, but Stifel still rates it as a Buy, and analyst Mark S. Astrachan raised the Target Price to $1,000 last week. Other retail stocks similar to Costco include $Walmart (WMT.US)$ The relevant ETFs include $VanEck Retail ETF (RTH.US)$ 。

• Financial Sector & Utilities Sector

JPMorgan and Bank of America have a bullish outlook on the US stock market for 2025, with both investment banks being bullish on sectors like Financial Sector (such as $Berkshire Hathaway-B (BRK.B.US)$ 、 $JPMorgan (JPM.US)$ 、 $Visa (V.US)$ 、 $MasterCard (MA.US)$ and utility stocks (such as $NextEra Energy (NEE.US)$ 、 $Southern (SO.US)$ 、 $Duke Energy (DUK.US)$ 、 $Constellation Energy (CEG.US)$ etc.).

Related ETFs include $Financial Select Sector SPDR Fund (XLF.US)$ 、 $Utilities Select Sector SPDR Fund (XLU.US)$ 。

Bank of America’s Savita Subramanian stated, “We like companies with healthy cash return prospects that are linked to the USA economy: specifically, large-value Stocks.”

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Editor/Rocky