On December 18, 2024, the US Federal Reserve reduced its projected future interest rate cuts by 0.5 percentage points. If the Fed met these projections, the target range of the fed funds rate would fall to 3.25%-3.50% by yearend 2026.
This reduction in expected future rate cuts caused US stocks to sell off today, with the S&P 500 and Nasdaq falling 2.95% and 3.56%, respectively. The Dow Jones Industrial Average fell for the tenth-consecutive day, a 50-year record.
US Treasury yields ticked slightly higher on the day, with the 2- and 10-year Treasury yields both up about 10 basis points.
Key drivers of the reduced rate-cut forecast were higher projected 2024 GDP growth and higher 2025 inflation compared to what the FOMC members projected in September 2024. We show these changes in economic projections in Figure 2 below.
Our new economic newsletter article projects the impact projected Fed rate cuts could have on future bond yields and mortgage rates based on this century's three prior interest rate cycles.
Other FOMC Economic Projections
The 19 Federal Open Market Committee ("FOMC") participants also projected PCE inflation to be 2.4% at yearend 2024 and for 2024 US GDP to grow 2.5%. The inflation projection was 10 basis points (equal to 0.1 percentage points) higher than what was shown in the September 2024 Summary of Economic Projections (the "SEP"). GDP growth projections for 2024 were 50 basis points higher in the December 2024 SEP vs. the September 2024 SEP.
In addition, the FOMC participants projected slightly lower yearend 2024 unemployment of 4.2%, compared to a 4.4% projection in September. With a strong economy and stubborn inflation, the FOMC elected to be less aggressive with its interest rate cuts.
Money market fund returns closely mirror the fed funds rate. If the fed funds rate follows the projected path to mid-3.00% by 2026, investors in the Vanguard VMFXX money market fund should expect their returns to follow suit.
This fixed income blog post covers key takeaways from the December 2024 Fed dot plot and the corresponding SEP, including:
- The medians of the December 2024 Fed dot plot project the fed funds rate to fall 50 basis points in 2025 (from the post-meeting range of 4.25% to 4.50%) and 50 basis points in 2026, for a total of 100 basis points (or 1.00 percentage points), as shown in Figure 1.
- As of December 18, 2024, many high-quality corporate bonds yielded between 5-7%, which can be locked in for 5, 10, or 20+ years. Yields of large money market funds, such as Vanguard VMFXX, vary monthly and will fall as the fed funds rate declines. Bond fund distributions also vary monthly and cannot be relied upon to deliver income the way fixed-rate individual bonds can.
- The December 2024 Fed dot plot projected 50 basis points less of 2025 Fed rate cuts than the Fed projected in September 2024.
- As of December 9, 2024, the Fed had reduced the size of its securities holdings ("the Fed balance sheet") by $2.1 trillion since reaching a peak of $9 trillion in April 2022.
- From September 16 to December 18, 2024, US Treasury yields had surged, with the 10-year US Treasury increasing 88 basis points to 4.51% (see Figure 2b).
- We encourage investors to consider the Fed dot plot in the context of the economic projections contained in the SEP and summarized in Figure 2.
The December 2024 Fed Dot Plot
The Fed dot plot shows the projected yearend target range for the fed funds rate from each of the 19 FOMC meeting participants. Each dot represents the opinion of one FOMC participant. For example, as shown in Figure 1, 10 FOMC participants projected a yearend 2025 fed funds target range of 3.75%-4.00%.
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The primary change between the September and December 2024 Fed dot plots is the amount of rate cuts in 2025. The Fed is now projecting 50 basis points (one-half percentage point) of total 2025 rate cuts compared to 100 basis points projected in the September 2024 Fed dot plot.
Figure 1: December 2024 Fed Dot Plot Showing Projected Target Range of Fed Funds Rate
Source: December 18, 2024 FOMC Summary of Economic Projections and Bondsavvy calculations.
We compare the projected fed funds rate paths shown in the last four Fed dot plots in Figure 1b below.
The FOMC Press Conference December 18, 2024
On December 18, 2024, Fed Chair Jerome Powell hosted a press conference after the FOMC released its 2:00pm Eastern Time statement that it would be reducing the target range for the fed funds rate by 25 basis points, from 4.50%-4.75% to 4.25-4.50%. Figure A shows key statements he made during the press conference, which included the FOMC's views on the labor market, inflation, and the rationale for rate cuts.
Figure
A: Key Statements from the FOMC Press Conference on December 18, 202
Image
licensed from Getty Images.
One item that received less press coverage was the continued reduction in the Fed's balance sheet, or its "securities holdings." The Fed grew its balance sheet from approximately $4 trillion in February 2020 to $9 trillion in April 2022 in the wake of Covid-19. On December 9, 2024, the Fed balance sheet had fallen $2.1 trillion to $6.9 trillion.
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Summary of Last Four Fed Dot Plots
Figure 1b compares the median levels for fed funds rate cuts and the fed funds target range across the last four Fed dot plots. Countless amounts of ink were spilled on how many rate cuts there were going to be in 2024. While that is one data point, we believe the more important projection is where the Fed sees rates going longer term.
Per Figure 1b, the total amount of projected 2024-2026 rate cuts was highest in the September 2024 Fed dot plot, which was slightly higher than earlier projections. As noted above, total projected rate cuts fell 50 basis points in the December 2024 Fed dot plot.
Our first economic newsletter article shows the impact 250 basis points of Fed rate cuts has had during the three most recent rate-cutting periods.
Figure 1b: Summary of Last Four Fed Dot Plots
| 2024 | 2025 | 2026 | Total Rate Cuts ('24-'26) | |
|---|---|---|---|---|
| Median Level of Rate Cuts in Given Year | ||||
| December 2024 Fed Dot Plot | -100 bps | -50 bps | -50 bps | -200 bps |
| September 2024 Fed Dot Plot | -100 bps | -100 bps | -50 bps | -250 bps |
| June 2024 Fed Dot Plot | -25 bps | -100 bps | -100 bps | -225 bps |
| March 2024 Fed Dot Plot | -75 bps | -75 bps | -75 bps | -225 bps |
| Median Yearend Fed Funds Target Range | ||||
| December 2024 Fed Dot Plot | 4.25%-4.50% | 3.75%-4.00% | 3.25%-3.50% | |
| September 2024 Fed Dot Plot | 4.25%-4.50% | 3.25%-3.50% | 2.75%-3.00% | |
| June 2024 Fed Dot Plot | 5.00%-5.25% | 4.00%-4.25% | 3.00%-3.25% | |
| March 2024 Fed Dot Plot | 4.50%-4.75% | 3.75%-4.00% | 3.00%-3.25% |
Sources: FOMC Summary of Economic Projections Reports and Bondsavvy analysis.
December 2024 Summary of Economic Projections
While the Fed dot plot often receives the most fanfare, it is driven by where FOMC participants believe the economy is and where it is heading. In connection with this, in the December 2024 SEP, the FOMC updated its projections for key economic indicators, including unemployment, inflation, and GDP growth. Figure 2 provides a summary of the projections across recent Fed SEPs.
As shown, a key change between the September and December 2024 SEPs (highlighted in yellow) was higher yearend 2025 inflation (2.1% vs. 2.5%). Chair Powell discussed how, for 2024, GDP growth is stronger than expected (as highlighted in Figure 2 in orange) and unemployment is lower than expected.
Powell also said, "Uncertainty around inflation...is actually higher." He said some, but not all, FOMC participants factored in the potential impacts of policies favored by the incoming Trump administration. "Some [FOMC participants] did identify policy uncertainty as one of the reasons for their writing down more uncertainty around inflation," Powell said. He also admitted, "...we've had a yearend projection for inflation and it's kind of fallen apart as we've approached the end of the year." He continued, "...inflation has once again underperformed relative to expectations." The higher yearend 2024 inflation coupled with economic policy uncertainty and stronger GDP growth led the FOMC to project higher 2025 inflation than it projected in the September 2024 SEP.
Figure 2: Median Economic Projections of FOMC Participants
| Date of Projection | 2024 | 2025 | 2026 | Longer Run |
| Unemployment Rate | ||||
| December 2024 | 4.2% | 4.3% | 4.3% | 4.2% |
| September 2024 | 4.4% | 4.4% | 4.3% | 4.2% |
| June 2024 | 4.0% | 4.2% | 4.1% | 4.2% |
| March 2024 | 4.0% | 4.1% | 4.0% | 4.1% |
| December 2023 | 4.1% | 4.1% | 4.1% | 4.1% |
| PCE Inflation | ||||
| December 2024 | 2.4% | 2.5% | 2.1% | 2.0% |
| September 2024 | 2.3% | 2.1% | 2.0% | 2.0% |
| June 2024 | 2.6% | 2.3% | 2.0% | 2.0% |
| March 2024 | 2.4% | 2.1% | 2.0% | 2.0% |
| December 2023 | 2.4% | 2.1% | 2.0% | 2.0% |
| Change in Real GDP | ||||
| December 2024 | 2.5% | 2.1% | 2.0% | 1.8% |
| September 2024 | 2.0% | 2.0% | 2.0% | 1.8% |
| June 2024 | 2.1% | 2.0% | 2.0% | 1.8% |
| March 2024 | 2.1% | 2.0% | 2.0% | 1.8% |
| December 2023 | 1.4% | 1.8% | 1.9% | 1.8% |
Source: FOMC Summary of Economic Projections Reports
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How Expected Rate Cuts Have Impacted US Treasury Yields
While the US Federal Reserve does not control long-term US Treasury yields, Fed policy and expectations of Fed policy changes can have a big impact. Figure 2b compares the Effective Fed Funds Rate to the 2-year, 10-year, and 20-year US Treasury yields. Longer-term Treasury yields impact what homeowners pay for mortgages and the interest rates companies pay on their debt, resulting in significant impact to economic conditions.
Per Figure 2b, US Treasury yields began increasing in advance of the Fed's first rate increase in March 2022. As these yields increased, they converged and had been moving, generally, in similar directions. Treasury yields fell in late-2023 after reaching a peak in October 2023, but then rose again until spring 2024, as inflation remained stubborn.
Then, in anticipation of Fed easing, there was a significant decrease in US Treasury yields across the yield curve. From April 18 to September 16, 2024, the 2-, 10-, and 20-year yields fell 142, 101, and 84 basis points, respectively. Yields then reversed course again, as September and October 2024 inflation reports came in hot, and concerns over continued high US budget deficits remained. This drove US Treasury yields materially higher, as the 10-year US Treasury yield increased 88 basis points between September 16 and December 18, 2024.
Read our first economic newsletter article to see how previous Fed rate cuts impacted bond yields and what this could mean for the path of bond yields in the future.
Figure 2b: US Treasury Yields vs. Effective Fed Funds Rate -- Jan 4, 2021 to December 18, 2024
Also of significance, on September 6, 2024, the 2-10-20-year yield curve was finally upward sloping, with respective yields to maturity of 3.66%, 3.72%, and 4.10%.
What the Fed Dot Plot Means for Investors
The expected downward trajectory of the fed funds rate creates advantages for individual corporate bonds over other investments, such as money market funds and bond funds and ETFs.
Total money market fund assets reached $6.8 trillion as of December 11, 2024, according to Investment Company Institute.
As we discuss in our Eight Reasons Not To Own Vanguard VMFXX blog
post, the VMFXX yield is highly correlated to the fed funds rate. As the fed funds rate falls, the VMFXX yield
would fall as well. In addition, since money market funds such as Vanguard VMFXX cannot achieve capital
appreciation, such investments would not benefit from an increase in bond prices associated with falling
interest rates.
Money market and bond fund distributions vary each month, and investors cannot lock in income the way they can with individual bonds. In our VMFXX yield blog post, we discuss how high-quality US corporate bonds have advantages to Vanguard VMFXX, including higher potential returns, lower fees, and higher credit quality. Individual corporate bonds allow investors to lock in high yields for 5, 10, or 20+ years and to benefit from capital appreciation opportunities. Neither of these key investment objectives is possible with money market funds.
Many high quality corporate bonds had YTMs between 5% to 7% in December 2024. Total return opportunities can be higher, as we show in our corporate bond returns page.
