In the early hours of Thursday Beijing time, the Federal Reserve will announce its last interest rate decision of the year, and officials may decide to cut rates for the third consecutive time while hinting that the extent of rate cuts next year will be lower than previously expected.

It turns out that the resilience of the U.S. economy is stronger than officials had expected a few months ago. Recent data shows that inflation is declining more slowly than they anticipated, and the labor market is not as weak as they feared.

These circumstances could prompt officials to adjust the wording in the post-meeting policy statement and raise expectations for the interest rate path.

Tim Duy, chief U.S. economist at SGH Macro Advisors, stated that stronger-than-expected economic data has also raised questions about whether the neutral rate has already risen. This uncertainty may give officials more reason to slow their rate cuts.

He said, 'From the Federal Reserve's perspective, it makes sense to slow down actions when assessing its position in the policy cycle.'

The Federal Reserve's interest rate decision and the officials' latest Summary of Economic Projections (SEP) will be released in Washington at 3:00 AM Beijing time on Thursday. Federal Reserve Chairman Powell will hold a press conference 30 minutes later.

Interest Rate Decision

According to futures contracts, the market generally expects the Federal Reserve to lower the benchmark interest rate by 25 basis points this week. However, this is not a popular decision.

A CNBC survey found that while 93% of respondents expect a rate cut, only 63% believe it is the right course of action. Former Kansas City Fed President Esther George and former Boston Fed President Eric Rosengren have also recently expressed their inclination to oppose a rate cut at this meeting.

Anna Wong, Bloomberg's chief U.S. economist, stated, 'Federal Reserve staff can now make highly accurate estimates based on CPI and PPI data. The core PCE for November, which will be released on December 20, is expected to perform poorly, which may have reluctantly convinced a few Federal Reserve officials who are concerned about upside inflation risks to accept another rate cut.'

This move would bring the federal funds rate to a target range of 4.25% to 4.5%, a full percentage point lower than when it began cutting rates in September.

Nevertheless, the benchmark interest rate remains well above the median forecast of 2.9% for the long-term neutral rate that officials expected in September. Recent comments from policymakers suggest they will revise up the estimate of this rate in the new forecast.

Economic Forecast

Recent data released in recent months shows that economic performance has been better than officials expected during their September meeting. This means that policymakers may revise up their economic outlook in the latest forecast, including higher inflation, lower unemployment rates, and stronger economic growth.

The most closely watched part of the updated forecast will be the 'dot plot,' which shows the expected interest rate path. According to most economists surveyed by Bloomberg News, the Federal Reserve is expected to cut rates three times next year, one less than the September forecast.

In contrast, the market's expectations for the Federal Reserve's rate cuts are more hawkish. According to CME's FedWatch, the market expects the Federal Reserve to cut rates only twice in 2025 after this week.

The Federal Reserve may slow the pace of rate cuts in 2025.

However, any forecast is unlikely to fully account for the potential impact of the policies of the elected President Trump. Several Federal Reserve officials have indicated that they are waiting for more details about Trump's tariffs and immigration policies before incorporating these into their growth and inflation forecasts.

Policy Statement

Federal Reserve officials may choose to retain the wording from November in the statement, indicating that the risks to achieving the Fed's employment and inflation targets are 'roughly balanced.'

However, economists at Barclays indicated that policymakers could also add wording to suggest they expect to 'gradually' lower interest rates.

Duy stated that another option is to update the statement, suggesting an open attitude towards pausing interest rate cuts in the near future. He expects the Federal Reserve to keep rates steady after this week's rate cut in January next year, and that officials can convey this message by introducing wording regarding the timing of further adjustments to interest rates.

Press Conference

Powell may elaborate during the post-meeting press conference on how officials interpret economic data and what it may mean for the policy outlook.

Regarding the economy, the Federal Reserve Chairman may face questions such as whether progress towards the 2% inflation target has stalled and whether officials' optimism about the job market is stronger than it was in September.

As for the policy outlook, he may be asked about the conditions for pausing rate cuts, and whether such a pause could come as soon as January next year. Investors will be listening closely for any insights on how officials will set future rate cut pace.

Additionally, Powell is almost certain to be asked how U.S. fiscal policy under Trump's leadership will affect monetary policy.

So far, Powell and his colleagues have ignored this issue, citing uncertainty between current rhetoric and future realities. Some economists believe that the incoming president's aggressive tariffs, tax cuts, and large-scale deportation plans may further exacerbate inflation.

Vincent Reinhart, chief economist at BNY Mellon and former director of the Federal Reserve's monetary affairs division, believes, 'Clearly, the Federal Reserve is in a dilemma. For officials, unless they are very certain about what changes will happen politically and economically, they cannot really change their forecasts to respond to those changes.'

He added, 'At the press conference, the most concerning aspect for people is the idea of skipping rate cuts. So I think, in this regard, it will be a hawkish rate cut. (Only) as (Trump's) policies actually take effect, the Federal Reserve may further update its forecast.'

Gold is skewed to the downside.

The next direction of gold prices, which have been fluctuating for several days, will be influenced by the Federal Reserve's policy statement, economic forecasts, and the wording in Powell's press conference.

Regardless of the hawkish rate cut expectations from the Federal Reserve or technical analysis, the risks for gold seem to be skewed to the downside.

FXStreet analyst Dhwani Mehta pointed out that the daily chart shows that gold prices have once again fallen below the 21-day moving average, which is $2,655. The 14-day Relative Strength Index (RSI) is flat but below 50, indicating that bears may maintain control in the future. The weekly low of $2,633 may provide some support, and if this support is broken, gold prices may test the low of $2,613 from December 6.

On the upside, gold prices face direct resistance at the 21-day moving average of $2,655. However, gold bulls need to hold above the 50-day moving average to begin a meaningful push towards the $2,700 level, thus advancing towards the multi-week high of $2,726.

Article forwarded from: Jinshi Data