WASHINGTON (Reuters) - Investors are considering it a near certainty that the Federal Reserve will cut interest rates by 25 basis points at its Dec. 17-18 policy meeting, with attention focused on the officials’ new economic projections that will be released along with the decision.
Those projections will include an updated look at how much further policymakers expect to cut rates in 2025 and perhaps 2026, an exercise that will have to take into account data that, in the meantime, shows firmer-than-expected inflation, a healthy labor market, an election outcome that could change the landscape for global trade and immigration, and ongoing geopolitical risks.
With so many factors to weigh, many analysts expect the collective message from the Fed's policy statement on Wednesday, Chair Jerome Powell's press conference, and the updated projections to be somewhat hawkish — with the Fed perhaps closer to pausing its easing cycle, or at least very reluctant to commit to many more cuts.
Here are some of the points Fed members will consider:
STUBBORN INFLATION
There has not been much improvement in inflation since the Fed's last economic projections in September or its policy meeting on Nov. 6-7. But some of the components have changed in ways that have left policymakers convinced that a gradual easing of price pressures is underway.
Housing cost increases have slowed and the PCE index -- which the Fed uses to gauge progress toward its 2% inflation target -- appears headed for a low reading when November data is released next week. However, that won't be until two days after the Fed's meeting ends.
RESILIENT LABOR MARKET
The job market continues to be one of the big surprises for the Fed. The unemployment rate has risen modestly since the Fed began raising interest rates in March 2022, but at 4.2% it remains below the long-term national average and well within the level that the Fed considers to represent approximately the full job.
Absent a bad surprise in December, the unemployment rate is likely to end the year below the 4.4% level that officials included in their September projections.
The creation of jobs, in turn, has slowed down compared to the pace of recent years and has led some authorities to consider that the job market is currently operating at a sustainable pace.
That resilience, however, is one reason members say they want to be cautious about future cuts, due to concerns that the economy is actually operating close to potential at this point.
WAGES X PRODUCTIVITY
Another pleasant surprise in the recent data: Workers continue to be more productive over time, and the improvements have been enough to reduce the impact of wage increases that would otherwise have been a bit too high for the Fed's inflation comfort zone
As a result, unit labor costs for businesses, a key to whether a tight labor market is fueling price pressures, have been rising at a more moderate rate.
STRONG DEMAND
Another sign of economic resilience has been consumer spending, which shows little sign of cooling beyond its return from Covid-19 pandemic-high levels to something more like pre-pandemic trends.
As long as people are employed and earning money, they will spend, one of the important conditions for the "soft landing" of inflation that Fed officials believe they are close to achieving.