The economic expansion has advanced from the initial recovery, and the focus is now on metrics the Federal Reserve is looking at to gauge the health of the economy. Since the Fed’s dual mandate is to keep prices stable and maximize employment, we will focus on labor and inflation metrics, keeping in mind the broader economic impact as well. We created a Fed Monitor to track some of the data points that will impact the Fed’s decisions to tighten financial conditions. Additionally, we try to quantify the data and information outside of the dashboard to determine if the Fed is being more dovish than the data, and likely to be more aggressive in the future, or if they are being hawkish relative to the data, and likely to be more conservative in the future.

The Federal Reserve cut interest rates by 0.25% at the December FOMC Meeting, marking the third consecutive rate cut and bringing the fed funds target rate to 4.25%-4.50%, its lowest since January 2023. However, the Fed reduced its 2025 rate cut projections from four to two, reflecting higher growth and inflation forecasts for next year.

Recent economic data suggests inflation is stabilizing above the Fed’s 2.0% target, while labor market conditions continue to cool. Headline CPI inflation rose to 2.7% year-over-year (Y/Y) in November, with core CPI steady at 3.3% Y/Y. However, headline CPI has increased at an annualized 3.0% pace over the last three months, and core CPI at 3.7% annualized. The good news is that shelter inflation is decelerating, which may lead to inflationary pressures easing next year if this trend continues. Shelter is 42% of core CPI. On the labor front, job growth rebounded to 227,000 in November, recovering from October’s hurricane and strike impacts. Employment growth is moderating, with a three-month average of 173,000, aligning with the 2018-19 pre-pandemic pace of 178,000. The unemployment rate, however, ticked up to a three-month high of 4.2%.

While the Fed cut interest rates by a total of 1.0% over the last three FOMC meetings of 2024, we anticipate no changes at the upcoming January meeting. The data-dependent Fed is likely to hold rates steady, preferring to evaluate the impact of recent cuts on key economic indicators in the coming months. We are moving the Fed-O-Meter dial to the right reflecting an anticipated Fed rate pause in January.