Will the Fed Cut Interest Rates Next Week? Here's What Wall Street Thinks.

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The U.S. Federal Reserve has two main objectives: Maintaining an annualized inflation rate of around 2%, as measured by the Consumer Price Index (CPI), and keeping the economy operating at full employment (although it doesn't have a specific target for the unemployment rate).

The Fed hiked the federal funds rate (overnight interest rates) to a two-decade high of 5.33% between Mar. 2022 and Aug. 2023, in order to tame an inflation surge that resulted from pandemic-related stimulus measures and disruptions to the economy.

But with the CPI finally trending back down, the Fed cut rates in September and November this year. The central bank will issue its final rate decision for 2024 on Dec. 18. Here's what Wall Street predicts will happen.

A photo of a podium with the Federal Reserve emblem on the front.
Image source: Getty Images.

Here's why the Fed cut rates in September and November

The U.S. government injected trillions of dollars into the economy during 2020 and 2021, while at the same time, the Fed slashed the federal funds rate to a historic low of near 0%. The moves were designed to counteract the effects of the pandemic by encouraging consumer spending to support the economy.

A rapid increase in money supply combined with ultra-loose monetary policy can be very inflationary. However, supply chain disruptions also sent prices soaring because factories closed around the world in order to stop the spread of COVID-19. That cocktail of forces sent the CPI rocketing to a 40-year high of 8.0% in 2022.

As I mentioned earlier, the Fed reacted with a series of aggressive rate hikes. Thankfully, the policy worked because the most recent CPI reading (Nov. 2024) came in at an annualized rate of 2.7%, which is very close to the Fed's target.

Plus, the unemployment rate gradually ticked higher throughout this year. It currently sits at 4.2% after starting 2024 at 3.7%, which could be a sign the jobs market is softening.

The Fed doesn't want to cause a recession by leaving rates too high for too long, which is why it cut the federal funds rate by 50 basis points in September, followed by another 25 basis points in November.

A cut is almost certain in December, according to Wall Street

Several Wall Street banks are forecasting another 25-basis-point cut from the Fed next week. Morgan Stanley, Goldman Sachs, Wells Fargo, and Citigroup are just some of the banking giants on that list.

The CME Group's FedWatch tool also suggests there is a 98% chance of a cut in December. It uses data from the Fed Funds Futures market to calculate that probability -- in other words, it's a good reflection of what traders and investors think the Fed will do at its next meeting.