WASHINGTON: The US Federal Reserve is widely expected to announce a quarter-point cut to its key lending rate on Wednesday, despite a recent uptick in inflation. This marks the central bank's final policy decision before President Joe Biden leaves office on January 20, handing the reins back to Republican Donald Trump for a second term.
The Fed is also likely to signal a slower pace of rate cuts moving forward amid growing uncertainty surrounding Trump’s economic proposals.
“The Fed is expected to adopt a more gradual approach to monetary easing in light of the new administration’s policies,” EY chief economist Gregory Daco told AFP, though he still predicts policymakers will vote for a rate cut this week.
While the Fed operates independently of Congress, it must consider the fiscal policies of the incoming government as it works to balance inflation and unemployment in the world’s largest economy.
Trump’s promises to tackle the high cost of living, a major concern for voters who returned him to the White House in November, have sparked debate among economists. Concerns center on his plans for sweeping tariffs on imported goods and deportations of undocumented workers—policies that could “stoke inflation and hinder growth,” according to KPMG chief economist Diane Swonk. Despite this, Swonk also expects the Fed to cut rates on Wednesday.
How many cuts?
Since September, the Fed has lowered rates by 0.75 percentage points, shifting its focus from strictly meeting its two-percent inflation target to better supporting the labor market.
Although inflation has edged up recently, the Fed’s preferred gauge remains near the two-percent goal. Meanwhile, economic growth has defied expectations, and the labor market, while slightly weaker, remains resilient overall.
A quarter-point cut would bring the Fed’s key lending rate to between 4.25 and 4.50 percent—down a full percentage point from earlier this year. Futures markets showed a 95-percent probability on Friday that the Fed will proceed with the cut, according to CME Group data.
Looking ahead, uncertainty looms. Markets currently price in a 65-percent chance that rates will be three-quarters of a percentage point lower by the end of 2025, signaling two additional quarter-point cuts next year on top of Wednesday’s expected move.
‘More gradual rate path’
The Fed will also release updated economic forecasts alongside its decision, including projections for future interest rate cuts.
In September, the Fed’s Federal Open Market Committee (FOMC) projected an average of four quarter-point cuts for 2025, bringing the key lending rate to between 3.25 and 3.5 percent.
However, with inflation ticking up, analysts now anticipate a slower pace. Economists at Barclays predict a quarter-point cut on Wednesday but expect the Fed to signal “a more gradual rate path” for 2025.
Goldman Sachs economists, in a recent investor note, forecast consecutive cuts in December, January, and March, followed by further reductions in June and September. Still, they caution that recent Fed statements suggest the pace could slow as early as January.
