The US Federal Reserve is expected to announce a quarter-percentage-point cut to its benchmark interest rate on Wednesday, bringing it to a range of 4.25% to 4.50%.
However, the central bank is also expected to signal a more cautious approach for future rate cuts in 2025. This “hawkish cut” strategy reflects the Fed’s balancing act as it responds to strong economic growth, persistent inflation, and the uncertainty surrounding the incoming Trump administration.
The dual message is likely to be closely scrutinized by investors, as Federal Reserve Chair Jerome Powell delivers remarks at a press conference following the policy decision. The central bank’s revised economic projections for 2025 will also be of key interest to markets seeking clarity on the direction of US monetary policy.
The expected 25-basis-point reduction would mark the third interest rate cut since September, following a more aggressive half-percentage-point cut that month and a smaller reduction in November. The move represents a shift from the Fed’s earlier strategy of tighter monetary policy aimed at combating inflation, which surged after 2021.
With the upcoming cut, the central bank will have reduced rates by a full percentage point since September, but it appears that the pace of cuts may now slow. Market analysts believe this more measured approach is a response to stubbornly high inflation and stronger-than-expected economic growth.
Beth Hammack, president of the Cleveland Fed, noted in a recent speech that “we are at or near the point where it makes sense to slow the pace of rate reductions.” This view is shared by other Fed officials who argue that a slower approach will give policymakers time to assess how previous rate cuts are affecting the economy.
While the Fed is expected to maintain a path of gradual rate reductions, analysts expect the updated guidance for 2025 to strike a more “hawkish” tone. According to the Fed’s most recent quarterly projections, policymakers had planned to lower rates to around 3.4% by the end of 2025. However, persistent inflation, coupled with strong labor market performance, may force the Fed to revise this outlook.
Economists at TD Securities anticipate a “more cautious” tone from Fed Chair Powell and the central bank’s projections, signaling that the pace of rate cuts may be slower than initially anticipated. Investors will be watching Powell’s press conference for any changes in forward guidance.
Krishna Guha, head of global policy and central banking strategy at Evercore ISI, stated that the Fed is “now entering a different and more cautious phase of policy, with a more noncommittal approach to the timing and extent of additional cuts.” This approach reflects the Fed’s effort to strike a balance between keeping inflation in check and supporting economic growth.
Recent economic data supports the Fed’s decision to slow the pace of rate cuts. A strong November retail sales report indicated robust consumer spending, while inflation remains above the Fed’s 2% target. The latest Consumer Price Index (CPI) data showed a 2.7% year-on-year increase in November, with some components, like housing costs, showing signs of moderation.
Labor market conditions also remain tight, with low unemployment and strong wage growth, further complicating the Fed’s task. While the central bank is focused on bringing inflation back to 2%, cutting rates too quickly could stimulate demand and drive inflation higher. On the other hand, failing to lower rates fast enough could slow the economy and weaken the labor market.
Adding to the Fed’s cautious approach is the uncertainty surrounding the incoming Trump administration, which will take office on January 20. President-elect Trump’s proposed economic policies — including potential changes to tariffs, tax policy, and immigration — could impact the U.S. economic landscape in unpredictable ways.
Fed Chair Powell is expected to avoid making any direct remarks about the incoming administration’s policies at the press conference, but policymakers will need to factor these potential changes into their economic forecasts. Analysts believe the Fed may pause rate cuts at its next meeting, scheduled for January 28-29, to better assess the new administration’s economic impact.
In a Reuters poll of 99 economists, 58 said they expected the Fed to hold rates steady at the January meeting, as it takes stock of the economic environment under the new White House leadership.
The prospect of a 25-basis-point cut combined with a more hawkish outlook for 2025 has prompted mixed reactions from financial markets. The anticipated “hawkish cut” suggests that borrowing costs will continue to decline, but at a slower pace than previously expected.
Investors have adjusted their expectations for future cuts, now predicting a smaller reduction of 50 basis points in 2025, down from the full percentage-point reduction that Fed officials had projected in September. Bill English, a former head of monetary affairs at the Federal Reserve and a professor at Yale University, said:
“They’re probably on a path to cut rates that’s a little shallower than before, but they still expect rates to continue to move down.”
The Fed’s announcement and Powell’s remarks will likely influence movements in equity and bond markets. Interest rate cuts typically reduce borrowing costs for consumers and businesses, which can fuel investment and spending. However, with inflation still above the Fed’s target, Powell is likely to emphasize that the Fed remains committed to price stability.
The Federal Reserve will release its policy statement and updated economic projections at 2 p.m. Eastern Time (1900 GMT) on Wednesday, with Powell’s press conference scheduled for 2:30 p.m. Investors and analysts will be watching closely for the following key points:
- Rate Cut Announcement: Confirmation of a 25-basis-point cut, reducing the target range to 4.25%-4.50%.
- Economic Projections: Clarity on the Fed’s updated forecasts for inflation, growth, and unemployment through 2025.
- Pace of Future Rate Cuts: Signals from Powell on the speed and extent of future rate cuts.
- Outlook on Inflation: Indications of how the Fed views inflation trends and whether additional cuts are justified.
- Impact of the Trump Administration: While Powell is unlikely to discuss the incoming administration directly, his comments on economic uncertainty may provide insight into the Fed’s thinking.
With input from Reuters and the Washington Post.
