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The outlook for interest rates is getting cloudy as a chorus of analysts on Wall Street suggests the Federal Reserve could signal that its ready to pause interest rate cuts at this week's meeting.
The Fed will convene for the final FOMC meeting of the year on Tuesday, and while markets see a 25-basis point interest rate cut as nearly certain, the view for January and beyond is murky.
According to Yardeni Research, Jerome Powell's press conference following the meeting will likely be used to communicate to investors that the next interest rate decision will be a pause.
"After a full 100bps of cuts since September 18, we expect Fed Chair Jerome Powell will use his press conference after the FOMC meets to signal that the Fed is on pause from further easing for now," Yardeni Research said in a note on Sunday.
A resilient and strengthening economy is a key reason the Fed will likely cement its expected interest rate cut on Wednesday as the last one for some time.
The Atlanta Federal Reserve's GDPNow projection suggests the economy will grow at an annualized rate of 3.3% in the fourth quarter.
That, combined with inflation that has begun to reverse course in recent months, suggests to Yardeni Research that more interest rate cuts from the Fed could have negative consequences.
"The reason for not cutting the FFR again early next year is not just because economic growth and inflation remain strong but because both might get hotter with further cutting," they said.
Jan Hatzius, the top economist at Goldman Sachs, has taken a similar view recently.
"We expect the main message of the December meeting to be that the FOMC anticipates that it will likely slow the pace of rate cuts going forward" Hatzius said in a note Sunday evening.
Hatzius removed a January interest rate cut from his forecast and now expects just two 25-basis-point interest rate cuts in 2025.
Futures markets are on board with this thinking. According to the CME FedWatch Tool, there's just a 15% chance of an interest rate cut in January.
But Torsten Sløk, chief economist at Apollo, believes the Fed could go a step further and shock markets next year by raising interest rates, and it all has to do with inflation.
"Recent inflation readings show signs that the decline in inflation has stalled, and there is a risk of acceleration," Sløk said on Sunday, adding that a re-acceleration in inflation similar to the 1970s is possible.
He added: "The recent uptrend, combined with strong economic momentum, is pointing towards a rebound in inflation in 2025 and not a softening to justify Fed cuts. The probability is rising that the Fed may have to raise interest rates in 2025.
The CME FedWatch Tool shows markets see a 0.1% chance that the Fed will hike rates next year.
