The Federal Reserve (Fed) is expected to announce its interest rate decision this Thursday (18). The market widely predicts that the Fed will cut rates by 25 basis points in December. According to the CME Fed Watch tool, the market expects a 97.1% probability of a rate cut in December, while the probability of no cut is only 2.9%. Moreover, if the Fed cuts by 25 basis points in December as expected, it will mark the third consecutive rate cut this year (in September, November, and December).

However, Fed Watch also shows that the market expects the probability of a rate cut of 25 basis points by the Fed in January next year (to 4.00%-4.25%) is only 16.6%.

Fed mouthpiece: Rate cuts may be paused next year

In this regard, Nick Timiraos, known as the 'Fed mouthpiece' (of The Wall Street Journal), wrote today that a 25 basis point rate cut this week is almost a foregone conclusion, but how Fed officials view the future direction of interest rates at this FOMC meeting may be more important than whether to cut rates.

The article mentions that Jon Faust, who served as an advisor to Powell from 2018 to early this year, stated:

At present, there are justifications for both rate cuts and maintaining the current rate. The views of Fed officials on the future trajectory of the federal funds rate may be more important than any decisions they make at the December meeting.

Additionally, although the Fed has indicated that inflation has recently slowed, some Fed officials believe that policies implemented by President-elect Trump after taking office will reverse the two major factors that the Fed is optimistic about regarding cooling inflation: 'falling commodity prices' and 'slowing wage growth.' Moreover, Fed officials are also uneasy about the investment boom in U.S. stocks and Bitcoin, as these situations may stimulate consumer spending and further fuel inflation.

In this regard, Nick Timiraos predicts that there may be a pause in rate cuts next year:

One option this week is to cut rates by 25 basis points and then use new economic forecasts to strongly signal that the central bank is prepared to cut rates more slowly.

Fed officials worry that 'excessive rate cuts' could trigger risks.

On the other hand, Timiraos' article also mentioned that within the Fed, there are two factions of officials, those in favor of and those against interest rate cuts. Among them, Fed Governor Bowman, who opposes rate cuts, stated in a speech earlier this month that if the rate cuts are too rapid, it could trigger an investment surge, which would reignite the already unstable inflation rate.

Additionally, Fed official Lorie Logan also warned:

Do not mistakenly assume that the 'normal' interest rate for the economy is far below the current level, leading to excessive rate cuts.

The article continues to point out that the 'rate cut supporters,' including Powell, also acknowledge concerns about cutting rates too quickly. However, given that the Fed has raised rates to a higher level over the past two years, they believe that the Fed is not at risk of excessively cutting rates at this time. Powell stated last month:

We are aware of the risks of excessive and rapid rate cuts, as well as the risks of insufficient rate cuts. Currently, it seems we are at the position we need to be.