• The Federal Reserve's December FOMC meeting is set to be a pivotal moment for markets.
• While a 25bps rate cut is a foregone conclusion, recent data showing sticky inflation and a resilient economy support the case for pausing rate cuts in 2025.
• As the Fed navigates these challenges, its communication will be critical in shaping market expectations and guiding investor sentiment.
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The Federal Reserve's final policy decision of the year takes center stage on Wednesday and the stakes are high. The U.S. central bank is widely expected to cut its benchmark interest rate by 25 basis points, bringing the federal funds rate to a range of 4.25%-4.50%.

However, most of the focus will be on the Fed's forward guidance for 2025, particularly as inflationary pressures remain elevated and economic growth continues to defy expectations.

As such, I anticipate the Fed’s updated ‘dot-plot’ and economic projections to emphasize fewer and slower rate cuts than previously forecasted.

Strong Economic Backdrop and the Fed's Conundrum

The U.S. economy's resilience in 2024, bolstered by robust labor markets and consumer spending , has helped fuel a historic stock market rally, with the S&P 500 up nearly 27% and the Nasdaq surging roughly 34% year-to-date.

Yet, recent inflation data shows progress toward disinflation may be stalling, potentially complicating the central bank's rate-cutting trajectory for 2025.

Taking that into account, Chair Jerome Powell will likely indicate a cautious stance at the post-meeting press conference , emphasizing the need for patience as the Fed weighs additional rate cuts next year.

Hawkish Cut?

While a December rate cut is practically a foregone conclusion, analysts suggest the Fed may hint at a pause in rate reductions, especially with looming inflationary risks tied to pro-growth policies under President Donald Trump.

The Fed's latest dot plot may revise expectations downward, from the current projection of four quarter-point cuts in 2025 to fewer, contingent on inflation and growth dynamics.

Fed fund futures currently imply rates will decline to 3.8% by the end of next year. However, Powell's recent comments suggest the possibility of fewer cuts if economic conditions remain robust.

All in all, I predict a ‘hawkish cut,’

Potential Impact on Markets

A hawkish Fed signaling a pause or slower pace of rate cuts could inject volatility into stock and bond markets.

The record-breaking rallies in equities, fueled by optimism surrounding AI-driven growth and pro-business policies under President Trump, might stall if investors sense a more cautious Fed.

Meanwhile, the U.S. dollar and Treasury yields, which have been rising in anticipation of Powell signaling a potential pause in policy easing, could see further upside in the days and weeks ahead.

Where to Invest Amid the Current Climate

In a climate of potential rate cut pauses and economic uncertainty, certain investment themes could stand out:

• Defensive Sectors : Utilities (NYSE: XLU ), healthcare (NYSE: XLV ), and consumer staples (NYSE: XLP ) offer stability, especially if rate cuts are slow. These sectors typically perform well in volatile markets.
• Dividend Stocks : Companies with strong cash flows and high dividend yields can provide steady income, making them attractive in a mixed-rate environment.
• Growth and AI-Focused Tech : While the tech rally may pause, long-term plays on artificial intelligence, cloud computing, and semiconductors remain compelling. Leaders like Nvidia (NASDAQ: NVDA ), Microsoft (NASDAQ: MSFT ), Broadcom (NASDAQ: AVGO ), and Palantir (NASDAQ: PLTR ) could continue to benefit from secular trends.

Using tools like the InvestingPro stock screener can help identify resilient companies with robust financials and solid growth prospects. Some notable names to consider adding to your watchlist include Chevron (NYSE: CVX ), Alibaba (NYSE: BABA ), Qualcomm (NASDAQ: QCOM ), Pfizer (NYSE: PFE ), Progressive, HCA Healthcare (NYSE: HCA ), McKesson (NYSE: MCK ), MetLife (NYSE: MET ), Lennar (NYSE: LEN ), Crocs (NASDAQ: CROX ), Las Vegas Sands (NYSE: LVS ), Okta (NASDAQ: OKTA ), and Hewlett Packard Enterprise (NYSE: HPE ).

Investors should stay diversified and vigilant, keeping an eye on macroeconomic signals and Fed communications for further clarity on the path ahead.

Conclusion

The Fed's policy decision and Powell's press conference on Wednesday will likely set the tone for markets heading into 2025. Investors will be watching for any signals about the balance of risks: whether inflation or economic strength takes precedence in shaping monetary policy.

Markets will eagerly await clarity on how policymakers plan to navigate the challenges ahead.

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Disclosure: At the time of writing, I am long on the S&P 500, and the Nasdaq 100 via the SPDR® S&P 500 ETF (SPY), and the Invesco QQQ Trust ETF (QQQ). I am also long on the Invesco Top QQQ ETF (QBIG), and VanEck Vectors Semiconductor ETF (SMH).

I regularly rebalance my portfolio of individual stocks and ETFs based on ongoing risk assessment of both the macroeconomic environment and companies' financials.

The views discussed in this article are solely the opinion of the author and should not be taken as investment advice.

Follow Jesse Cohen on X/Twitter @JesseCohenInv for more stock market analysis and insight.