On December 18, the Financial Associated Press reported (Editor: Xiaoxiang) that as the Federal Reserve's rate cut journey gradually shifts from the "fast lane" to the "slow lane," are global market investors ready to brace for the "bumps" along the way?

At 3 AM Peking time on Thursday, the Federal Reserve is about to announce the much-anticipated December interest rate decision, and Federal Reserve Chairman Powell will, as usual, hold a routine press conference half an hour later (3:30). Currently, the industry generally expects the Federal Reserve to cut rates by another 25 basis points at this week's meeting, which has almost no suspense.

This will also be the Federal Reserve's third consecutive meeting to announce a rate cut following September and November, and the cumulative rate cut for the year is expected to reach 100 basis points.

As shown in the following chart, the pricing in the interest rate swap market indicates that the probability of the Federal Reserve cutting rates tonight has exceeded 95% — typically, such a high probability estimation rarely leaves room for unexpected occurrences. Media surveys also show that among 103 surveyed economists, as many as 93 expect the Federal Reserve to take rate-cutting measures this week.

However, although the Federal Reserve's rate cut tonight is almost a foregone conclusion, it may still turn out to be an unusual meeting night. In fact, tonight's rate cut will not only be the last cut by the Federal Reserve in 2024, but there are also some "special tags" behind it — for example, the renowned journalist Nick Timiraos, known as the "new Federal Reserve correspondent," mentioned in a recent column that many Federal Reserve officials have recently hinted that this week's rate cut may be the end of the "first stage of the two-stage rate cut cycle."

It is evident that the prominent features of the Federal Reserve's current rate cut cycle "first phase" so far are: high frequency and low threshold. Federal Reserve officials only began to cut rates until September this year, but when they did, it was "extraordinary" — they directly lowered rates by 50 basis points. Last month, they again cut rates by 25 basis points. Meanwhile, during this so-called "first phase," the threshold for officials to cut rates was relatively low, as they had previously maintained borrowing costs at very high levels.

But now, Federal Reserve officials are facing a potential turning point — signs indicate that the stability of the US labor market has improved since September, inflation has also slightly risen, under these circumstances, Powell is trying to find a more appropriate level of policy easing. He faces doubts from some colleagues about continuing to cut rates, and those who strongly supported the previous two rate cuts also have diminished confidence in further cuts. At the same time, the trade, immigration, regulation, and tax policy reforms proposed by Trump may also reshape the USA's economic growth, employment, inflation, and even debt outlook in the coming years.

Consequently, many industry insiders currently believe that entering the "second phase" of the Federal Reserve's interest rate cut cycle next year: the pace of rate cuts by the Federal Reserve will be more gradual, and the threshold will be raised. Achieving an uninterrupted "three consecutive cuts" like at the end of this year may no longer be an easy task...

Tonight's Federal Reserve decision highlights ①: Will it hint at pausing rate cuts in January?

From tonight's rate decision, one point that investors are quite concerned about is whether the Federal Reserve will hint at pausing rate cuts in January.

If deemed necessary, the Federal Reserve may very well provide some subtle hints in the post-meeting policy statement. Of course, Federal Reserve Chairman Powell may naturally also touch upon this topic during the post-meeting press conference, either actively or passively (if questioned by journalists).

According to the CME Group's Federal Reserve watch tool, traders currently estimate that the probability of a further rate cut to 4.00%-4.25% in January is only 16.3%.

It is clear that there are quite a few Wall Street institutions that believe the Federal Reserve might take this opportunity during the policy meeting to signal a pause or slowdown in the rate cut pace. Yardeni Research indicated in a report last Sunday that Federal Reserve Chairman Powell may use the post-meeting press conference to convey to investors that the next rate decision will be to pause cuts. The institution stated, "Since September 18, after a total of 100 basis points cut, we expect Powell to signal at the December post-meeting press conference that the Federal Reserve will temporarily pause further easing."

Goldman Sachs Chief Economist Jan Hatzius shares a similar view. In a report last Sunday evening, he stated, "We expect the main message from the December meeting will be that the FOMC anticipates a slowdown in the pace of rate cuts in the future." Hatzius has removed the expectation of a rate cut in January and anticipates the Federal Reserve will cut rates three times in total in March, June, and September next year.

Danske Bank believes that Powell's speech will strive to maintain a Neutral stance, but he may still verbally leave the door open for slowing the pace of easing.

Recently, some Federal Reserve officials have begun to suggest that they need to see more specific evidence showing that inflation is improving or that the labor market is deteriorating before continuing to lower borrowing costs.

Earlier this month, Cleveland Fed President Beth Hammack stated, "We have reached or are nearing the point where we should slow down the pace of rate cuts." She praised two rate cuts in the 1990s when the Federal Reserve quickly lowered rates by a cumulative 0.75 percentage points and then shifted to a wait-and-see approach.

Highlights of tonight's Federal Reserve decision ②: How many times can rates be cut next year?

In addition to whether it will suggest a pause in the rate cuts in January, another aspect of tonight's Federal Reserve decision that will directly reflect the officials' "hawkish or dovish" attitudes is undoubtedly the quarterly released Federal Reserve dot plot. This famous key chart may answer two questions that the market is particularly concerned about: How many times will the Federal Reserve actually cut rates next year? What does the Federal Reserve currently consider to be the ideal neutral interest rate?

The so-called neutral interest rate refers to the level of interest rates that neither stimulates nor suppresses economic activity, which is the level that officials dream of. However, determining the neutral interest rate level is not easy, and economists have a range of estimates. The closer the Federal Reserve is to the neutral interest rate estimate, if inflation remains strong and the labor market does not weaken, the less justification there is for cutting rates.

The ideal Neutral interest rate in the eyes of the Federal Reserve will directly affect officials' determination of how many times to lower interest rates next year. Earlier this month, Federal Reserve Chairman Powell stated that strong economic performance means that the Federal Reserve does not need to "hurry" to cut interest rates, but little else was specifically mentioned regarding the pace of rate cuts. He also emphasized that the Federal Reserve is unsure where the "Neutral" interest rate actually lies, stating that "it can only be known through practice."

At the September meeting this year, Federal Reserve officials' median projections in the dot plot for their policy path showed that the rate cuts this year and next would each reach 100 basis points. However, following a series of stubborn inflation readings and cautious comments from Federal Reserve officials, the aforementioned rate cut forecast for 2025 has clearly come under scrutiny.

Many Wall Street major firms have recently begun to expect that the Federal Reserve may cut rates one less time next year (compared to the September estimate) — meaning a total of only 75 basis points may be cut. Some even predict that the Federal Reserve may ultimately cut rates by only 50 basis points — a level that roughly corresponds to the current pricing in the swap market.

Former Cleveland Fed Chair Mester recently stated that the Fed's prior forecast of four rate cuts "needs to be reconsidered," and predicted that the pace in 2025 would "slow down." She believes, "Two to three rate cuts seem appropriate to me."

Danske Bank expects that the median of the federal funds rate at the end of 2025 may rise by 25 basis points compared to the September dot plot and reach 3.625%. The bank also noted that given the recently published data and some committee members' latest statements, the possibility of a 50 basis point increase cannot be ignored. The long-term interest rate forecast may be revised up from 2.9% in September to above 3.0%.

Goldman Sachs expects that the median of the Fed's dot plot tonight will likely show three rate cuts in 2025 (to 3.625%), two cuts in 2026 (to 3.125%), and the rate stable at 3.125% in 2027; these forecasts are all 25 basis points higher than the September dot plot. Additionally, Goldman Sachs anticipates that the median long-term or neutral rate will rise by 0.125 percentage points to 3%.

Overall, a basic judgment we can make from these investment bank forecasts is that if the Fed's dot plot tonight reduces the expected number of rate cuts next year to three, it roughly aligns with expectations. If it further drops to two, that would be a more hawkish outcome. Additionally, a noteworthy detail is that the Fed's forecast for long-term interest rates may further rise to 3%.

What other considerations do investors need to pay attention to tonight?

Regarding some other details, Goldman Sachs believes that the key issue in the Fed's policy statement is whether officials will emphasize slowing the pace of rate cuts more or continue to make decisions based on data from each meeting. Goldman Sachs expects the Fed to convey both messages and include related hints in the statement.

The Fed's quarterly economic outlook (SEP), which includes the interest rate dot plot, will also show the Fed's latest forecasts for the economy, inflation, unemployment rate, and interest rates tonight, which will be significant for assessing the future direction of the Fed's monetary policy.

Wells Fargo & Co's report believes that the Fed's latest forecast will show that the recent USA economy is stronger than expected. The median forecast for real GDP growth in 2025 and 2026 is expected to rise by 0.1 or 0.2 percentage points compared to the September forecast, and the unemployment rate forecast may decrease by 0.1 percentage points. In light of the stronger recent price pressures, the inflation forecast for 2025 and 2026 will be revised up by 0.1 or 0.2 percentage points.

ING Groep believes that the Fed's forecast for economic growth and inflation at the end of 2024 will be slightly adjusted upwards, with a slight decrease in the unemployment rate forecast, but the institution expects the Fed will not significantly change its forecasts for 2025.

Additionally, Goldman Sachs expects that the Fed's forecast for next year's unemployment rate will be unchanged from this year (both at 4.2%), while the forecast for next year's inflation rate will rise to 2.4%, higher than September's 2.1%.

It's worth mentioning that the minutes from the Fed's November meeting showed that some decision-makers believe it would be valuable to consider a 'technical adjustment' to the overnight reverse repurchase agreement (ON RRP) quote rate to align it with the bottom of the federal funds rate target Range. Investors should pay attention to whether the Fed will implement related changes in tonight's decision.

The overnight reverse repurchase agreement rate plays a role in three important components of the Fed's short-end rates, the other two being the interest rate on excess reserves (IOER) and the federal funds rate (FER); the overnight reverse repurchase agreement rate typically represents the lower limit of the federal funds rate corridor.

"The Battle of the Nemeses": Will Powell mention the impact of Trump 2.0?

Finally, tonight's Fed decision also has an interesting suspense, namely, as the last interest rate meeting before Trump's presidency, will Powell comment on the effects of the Trump 2.0 policy?

"New Fed Correspondent" Nick Timiraos mentioned on Tuesday that the trade, immigration, regulation, and tax policy reforms proposed by Trump may reshape the economic growth, employment, and inflation outlook in the coming years. Fed officials may start thinking about how to respond to these changes in this week's meeting.

For example, expelling illegal immigrants and reversing loose immigration policies may drive up wages but suppress demand. Tariffs may increase prices, but they can also compress profit margins, strengthen the dollar, or dampen business confidence. Any increase in energy output could help offset price rises in other areas.

Powell has stated that the Federal Reserve should not speculate or take risks in guessing the impact of these policies. In a speech earlier this month, Powell enumerated a series of unknowns regarding tariffs, including which products and countries would face tariffs, the scale of the tariffs, how much warning businesses would receive, and how other countries would respond. He said, 'We have to wait and see.'

However, some former Federal Reserve officials believe that the Federal Reserve should incorporate the potential changes in immigration and trade into their forecasts, as these policies do not require congressional approval.

Eric Rosengren, who served as president of the Boston Federal Reserve from 2007 to 2021, stated, 'It's hard to ignore what is expected to happen starting on January 20 (the inauguration of Trump) when making predictions in mid-December.'

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