The Federal Reserve is widely expected to announce a 25-basis-point rate cut on Dec. 18, marking its third consecutive reduction after slashing rates by 50 basis points in September and by 25 in November.

Markets have fully priced in this move, assigning nearly a 100% probability, as per CME FedWatch tool.

But the real story isn't just this rate decision — it's the signals embedded in the Fed's updated Summary of Economic Projections (SEP) and Chair Jerome Powell‘s press remarks that could shape 2025's monetary policy trajectory.

Traders should brace for potential surprises.

Inflation's Resurgence Clouds The Fed's Interest-Rate Path

Recent data have reignited inflation concerns, complicating the Fed's roadmap for future cuts.

November’s Consumer Price Index (CPI) rose 2.7% year-over-year, notching its second consecutive increase. Meanwhile, the Producer Price Index (PPI) surged to 3% annually — the fastest since February 2023.

This inflation uptick has already pushed traders to reconsider the pace of cuts next year, with Fed futures currently pricing a 50% chance of another reduction by March 2025, down from higher odds just weeks ago.

The Fed's last SEP, released in September, projected that headline Personal Consumption Expenditure (PCE) inflation would fall to 2.1% by 2025, with Core PCE inflation — a preferred measure — declining from 2.6% in 2024 to 2.2%.

Yet, an upward revision in December could signal the Fed's discomfort with recent price trends, hinting at a more prolonged restrictive stance.

Dot Plot Drama: Slower Cuts Ahead?

The infamous dot plot — showing individual policymakers' views on the future path of rates — will likely take center stage.

In September, the median dot forecasted the fed funds rate down from 4.4% in 2024 to 3.4% by the end of 2025, suggesting 100 basis points of cuts over the next year.

But if the December update scales back the expected pace of cuts, it could deliver a hawkish jolt to markets.

Goldman Sachs economist David Mericle commented, "We expect the FOMC to signal a slower pace of rate cuts moving forward. Our revised forecast eliminates a January cut in 2025 but maintains cuts in March, June, and September, now projecting a slightly higher terminal rate of 3.5%-3.75%."

“The FOMC will likely signal that rate cuts will continue in 2025, but at a slower pace than between September and December,” Comerica Economics stated.

“Given current growth and inflation dynamics, we expect that the Fed's rate cuts will then be on pause until March at the earliest,” Joseph Brusuelas, economist at RSM US LLP, said.

According to Brusuelas, the dot plot “will show a median estimate of next year's federal funds rate of 3.625%, which reflects a 25 basis-point increase from the September forecast.”

Growth And Jobs: What's The Fed Signaling?

Economic growth and labor market projections could also hold critical clues.

In September, the Fed anticipated GDP growth of 2% annually through 2025 and 2026, alongside an unemployment rate steady at 4.4% for 2025 and edging down to 4.3% in 2026. If these projections hold steady, it suggests the Fed remains cautiously optimistic about the economy’s resilience.

Yet, any significant revisions — particularly on jobs — could heighten market volatility during the final trading days of the year, just as the SPDR S&P 500 ETF Trust SPY battles for its strongest annual gains since 1998.

“While everyone embraces the [stock market] bubble, I suggest buying a pacemaker for Christmas as a hedge,” David Rosenberg, president of Rosenberg Research & Associates Inc., stated on social media X.

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