The Federal Reserve is anticipated to lower its key interest rate on Wednesday, a decision that could have significant implications for the economy. However, the future trajectory of interest rates remains uncertain.
Fed officials are expected to provide insights into how they are interpreting recent economic data, which indicates persistent inflation and a resilient yet cooling labor market.
Expectations for further rate cuts in the coming year have been reduced, and the economic policies of incoming President Donald Trump, including his tariffs, pose an unpredictable factor that could influence the Fed’s monetary policy.
Financial markets are currently pricing in a 99% chance that the Federal Reserve will cut the fed funds rate by a quarter percentage point to a range of 4.25% to 4.5%, as per the CME Group’s FedWatch tool.
In the year ahead, rate reductions are expected to be infrequent. The rationale for rate cuts has weakened due to reports showing inflation remaining above the Fed’s 2% target, while the job market remains relatively robust.
The Fed’s dual mandate is to combat inflation and prevent severe unemployment. A recent slowdown in the job market raised concerns among Fed officials, leading to a significant rate cut in September.
Economists are projecting fewer cuts in 2025. The forthcoming economic projections at Wednesday’s meeting are crucial, with Wells Fargo economists predicting only three quarter-point cuts instead of four, while Deutsche Bank economists foresee the Fed keeping rates on hold for at least a year.
Fed Chair Jerome Powell’s post-meeting press conference will be pivotal in understanding the Fed’s stance on future rate cuts and the economic outlook.
Moody’s Analytics anticipates two rate cuts for the upcoming year.
Trump’s Policies Introduce Uncertainty for the Federal Reserve
The transition in the presidential administration complicates future predictions. The direction of inflation and the economy may depend on President-elect Donald Trump’s economic strategies, particularly the heavy tariffs he has announced for implementation on his first day in office.
Economists have differing views on the severity of these tariffs, their role as negotiation tactics, and their economic impact. Many predict inflation will increase as businesses pass on the costs of new import taxes to consumers.
Tariffs could also negatively affect U.S. businesses and economic growth, prompting the Fed to potentially lower rates to stimulate business and protect the labor market.
“The challenge for the Federal Reserve will be to distinguish the supply-side shock of tariffs from demand-driven trends in employment and inflation,” according to Wells Fargo Securities.
These uncertainties may lead the Fed to approach future rate cuts with caution.
“The potential for significant changes in trade and domestic policy due to the incoming Trump administration adds to the uncertainty and supports a more wait-and-see approach from the FOMC,” noted Matt Colyar from Moody’s Analytics.
Update, Dec. 18, 2024: This article has been updated to include the latest data from the CME FedWatch Tool.