Investors expect a significant, but predictable outcome when the Federal Reserve concludes its most recent meeting, which will be Thursday: a reduction of 25 basis points in interest rates.
The decision is in line with the efforts of recalibration monetary policy, as data from economic indicators point to a moderated rate of inflation and cooling employment market.
While the Fed’s cut is to be expected, attention will quickly shift towards Jerome Powell and his outlook for future Fed policy.
Background of the political changes
Donald Trump’s return as president has altered the political landscape.
The Fed could face complex challenges as a result of Trump’s ambitious policy goals, including tax cuts, increased government spending and tariffs that are protectionist.
Trump’s approach to economics kept the inflation rate below 3% during his first term, from 2017-2021. This was despite aggressive fiscal policies.
However, economists warn that by repeating this playbook, inflationary pressures could be re-ignited.
Krishna Guha is the head of global strategy at Evercore ISI. He predicted Powell would strike a neutral note, continuing with Fed tradition to remain apolitical.
Powell is likely to indicate that the Fed will need time to assess the plans of the new administration and adjust its policy when it’s clear how the actual implementations will be.
Powell’s balance act: immediate cuts and future directions
After last month’s reduction of 50 basis points, the Fed Funds rate is expected to move towards 4.5%-4.7%.
The traders are watching Powell’s remarks after the meeting for clues about what lies ahead.
Indirectly, the rate affects consumer debt and other types of debt.
Quincy Krosby is the chief global strategist at LPL Financial. He said that in an article on CNBC, “everyone’s looking out for rate reductions and if anything has been telegraphed.”
Krosby pointed out that, even though the Fed continues to focus on taming inflation and reducing its impact on consumers’ lives, there is still a question: Can Powell and his team claim victory?
Questions unanswered and projections of economic growth
The announcement on Thursday will not include an updated Summary of Economic Projections.
The quarterly report provides a summary of the official’s predictions regarding GDP, inflation and unemployment rates.
In December, the next SEP report is expected. This could give us more information about how the Fed sees the economy in light of changing political dynamics.
Bill English, former Fed head and Yale professor of finance, noted in the report how the phrase “terminal rates” could reappear if the yields continue to climb without any clear connection with growth.
English said that the Fed may consider a pause in its rate changes to evaluate their effect on the economy. The economy remains resilient, despite uncertainty.
Market forecasts for 2025 and the future of cuts
Market sentiment is divided on the future of interest rates.
Fed funds futures suggest that the target range could drop by a whole percentage point to 3.75-4.0% in 2025.
The Secured Overnight Finance Rate, on the other hand, suggests a conservative outlook. It shows that short-term interest rates will stabilize around 4,2% by 2025.
The disparity between the two reflects different assessments by traders of Trump’s policies and inflation.
Powell’s team may need to reconsider their rate path if inflation rises due to fiscal or protectionist spending.
Bond run-off : A quiet and persistent strategy
Since June 2022 the Fed’s balance sheet has steadily been reduced, with almost $2 trillion of bonds being sold.
Powell suggested this process may continue, even if rates are cut. Wall Street believes the rate runoff will end in early 2025.
English made it clear that, while the Fed is content to let this strategy unfold quietly, any future changes could be scrutinized.
The Fed is expected to reduce rates on Thursday. This post may change as new information becomes available.
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