What to expect from next week’s Federal Reserve interest rate meeting

The Federal Reserve is widely expected to cut borrowing costs at its meeting next Wednesday, with officials likely to reveal how recent economic data could impact interest rate decisions in the new year. be.

Financial markets believe the Federal Reserve could cut the federal funds rate by a quarter point in the range of 4.25% to 4.5%, according to CME Group’s FedWatch tool, which predicts interest rate movements based on federal funds futures contracts. It incorporates 97% of data. Next year, those rate cuts may become more sparse.

The case for the Fed’s interest rate cuts has waned recently amid reports that inflation remains above the Fed’s 2% annual target while employment remains relatively plentiful. The Fed lowered its benchmark interest rate in September and November after holding it at a 20-year high for more than a year to stem a post-pandemic inflation explosion.

The federal funds rate affects interest rates on credit cards, auto loans, and business loans. Today’s high interest rates are intended to act like sand in the wheels of the economy, discouraging borrowing and slowing activity to reduce inflationary pressures.

The Fed’s mission is not only to fight inflation, but also to prevent severe unemployment. Earlier this fall, Fed officials became increasingly concerned about that part of their dual mandate as the job market slowed, leading them to cut interest rates by a whopping 50 points in September. Employers have avoided large-scale layoffs, but have slowed hiring efforts.

Economists expect cuts to narrow in 2025

An open question from Wednesday’s meeting is how the Fed will balance these two priorities in its future rate-cut plans, and what Fed Chairman Jerome Powell will say about the outlook in his post-meeting press conference. be. Although interest rate trends are mostly solidified next week, future rate cuts remain up in the air.

In their last economic forecast in September, Fed policymakers expected to cut interest rates to a range of 3.25% to 4.5% by the end of 2025, a full percentage point below their expected levels at the end of this year. It has become standard.

Wells Fargo economists expected only three quarter-point cuts in 2025 instead of four in their next forecast, to be released at Wednesday’s meeting. Despite their expectations, Deutsche Bank economists expected the Fed to keep interest rates on hold for at least a year and not cut rates. Moody’s Analytics predicts two rate cuts next year.

President Trump’s policies are a wild card for the Fed

The change in presidential administrations makes predictions about the future more dangerous than usual. Inflation and the economy’s trajectory may depend on President-elect Donald Trump’s economic plans, particularly the heavy tariffs he said he would impose on U.S. trading partners on his first day in office.

Economists vary in their assumptions about how severe these tariffs will be, how much they are merely a negotiating tactic, and what impact they will have on the economy. Many forecasters assume inflation will rise as retailers pass on the cost of new import duties to consumers.

Complicating the impact on the Fed, tariffs could also harm U.S. businesses and economic growth, forcing the Fed to cut interest rates to stimulate the economy to keep the labor market afloat. Probably.

“The challenge for the Fed will be to parse the supply-side shock from tariffs from the perspective of demand-driven trends in employment and inflation,” economists at Wells Fargo Securities wrote in a commentary.

All of these unanswered questions could make the Fed more cautious about future rate cuts.

“The potential for dramatic changes in trade and domestic policy by the incoming Trump administration is further uncertainty and supports the FOMC’s wait-and-see approach,” Moody’s Analytics economist Matt Collier said in a commentary. said.