The Federal Reserve is expected to lower borrowing costs on Thursday, with some observers calling it a 'hawkish rate cut.' This rate cut will be announced alongside updated interest rate outlooks and economic forecasts from policymakers, covering the initial months after the Trump administration took office.
The anticipated 25 basis point rate cut would lower the Fed's benchmark rate to a range of 4.25%-4.50%, one percentage point lower than the level when it began easing monetary policy in September to address the inflation surge that started in 2021.
How much rates will decline next year and how quickly remains increasingly uncertain. Inflation is still above the Fed's 2% target, economic growth is faster than expected, and the tariffs, taxes, and immigration policies of President-elect Trump may unpredictably alter the economic landscape after he takes office in January.
In its latest quarterly forecast in September, Fed officials anticipated further lowering the benchmark rate by one percentage point, bringing it to around 3.4% by the end of 2025.
As inflation data shows it stalling above the Federal Reserve's 2% target and following Trump's victory in the presidential election on November 5, investors now believe the Fed may only cut rates by 50 basis points next year. They will closely watch officials' forecasts and Fed Chair Powell's comments at the post-meeting press conference to determine if policymakers are becoming more cautious about further rate cuts.
Economists at TD Securities wrote before this week's two-day meeting, 'While the Federal Reserve will still be keen on forecasting further easing in 2025, future guidance on the speed of rate cuts may be more cautious.'
The Federal Reserve will release its policy statement and updated economic forecasts at 3:00 AM Beijing time on Thursday, with Powell holding a press conference half an hour later.
Data, including the strong retail sales report for November released on Tuesday, has done little to change the Fed's statement after its last policy meeting that the economy is 'growing robustly,' with low unemployment and inflation, although it has decreased, 'still slightly above expectations.'
KPMG Chief Economist Diane Swonk wrote before this week's meeting that after a new policy statement, forecasts, and Powell's press conference, the ultimate outcome may be a 'hawkish rate cut,' with the Fed's future rate cuts slowing down.
She said, 'The debate will be fierce, the economic conditions are stronger than participants thought when they began cutting rates in September, and inflation improvement seems to have stalled... The Fed will want time to pause and see the specifics and how policies might change after the president-elect is sworn in.'
Trump will take office on January 20, and the Federal Reserve will hold its first policy meeting of 2025 on January 28-29 (less than a week later). A recent Reuters survey showed that among 99 economists, 58 expect the Fed to skip a rate cut at that time as policymakers assess the evolution of the economy.
Article forwarded from: Jin Shi Data