The Fed Will Cut Rates Next Week, Ending the First Phase of Easing

The Federal Reserve is expected to lower its benchmark interest rate by a quarter percentage point next week, continuing its gradual strategy to ease monetary policy despite shifting economic conditions.

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Overview of the Rate Cut

The anticipated move aligns with the Fed’s plan, initiated in September, to implement a series of swift rate cuts. If enacted, the reduction would bring the Fed’s target range to 4.25%-4.5%, marking a full percentage point decrease from its peak earlier in September.

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Krishna Guha, vice chairman of Evercore ISI, described this as the conclusion of the first phase of the Fed’s monetary policy cycle. He expects Chair Jerome Powell to usher in a new phase during his post-meeting press conference, emphasizing uncertainty and a cautious approach moving forward.

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Powell is likely to highlight the Fed’s commitment to carefully reducing rates but will signal a less predictable path for future cuts, reflecting the evolving economic landscape.

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The upcoming decision is expected to generate debate among Federal Open Market Committee (FOMC) members. Some officials may advocate for additional cuts, while others might prefer a pause to assess the economic impact of prior adjustments.

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“This isn’t an easy call,” said Robert Kaplan, former president of the Dallas Fed. He noted that while cutting rates might continue to suppress demand and mitigate inflation, it also reduces the risk of pushing the economy into a recession.

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Former Federal Reserve Governor Larry Meyer emphasized that most officials believe the current funds rate remains above the so-called neutral level, which neither stimulates nor suppresses demand. However, he acknowledged considerable uncertainty surrounding estimates of this neutral rate, further complicating the decision.

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The FOMC is set to meet next Tuesday and Wednesday, with a policy statement expected at 2 p.m. Wednesday, followed by Powell’s press conference at 2:30 p.m.

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Traders in the fed-funds futures market overwhelmingly anticipate a rate cut, supported by Powell’s recent comments, which appeared to downplay inflation concerns.

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“They won’t disappoint the markets next week,” said Eugenio Aleman, chief economist at Raymond James. Similarly, Stephen Stanley, chief U.S. economist at Santander, observed that Powell’s relaxed stance on inflation has reassured investors about the likelihood of a cut.

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During the meeting, the Fed will also release its updated economic and monetary policy forecasts. Analysts are keen to see how many rate cuts the central bank anticipates in 2025. In September, officials projected four quarter-point reductions, equating to one cut per quarter.

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However, Aleman predicts the Fed may now signal only two cuts for next year, aligning with current market expectations. Conversely, Guha anticipates a median projection of three cuts, which he characterized as “superficially dovish.”

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The Fed’s policy direction could face additional complications in 2025 due to potential fiscal measures under the Trump administration. Carl Weinberg, chief economist at High Frequency Economics, warned that proposals such as imposing 30% import tariffs on Canada and Mexico could derail plans for rate cuts.

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“If those tariffs are implemented, all bets are off for further cuts,” Weinberg stated. Other policies, including stricter immigration enforcement and tax reductions, could also contribute to inflationary pressures.

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Despite these risks, economists do not expect the Fed’s upcoming economic forecast to account for the Trump administration’s proposals. Powell has previously indicated that the Fed cannot preemptively factor in uncertain government policies, highlighting the inherent unpredictability of Washington.

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The Fed’s cautious stance reflects the complexity of the current economic environment. “There are so many conflicting signals,” said Aleman. “It’s not easy to make policy decisions with this level of uncertainty.”

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Powell and his colleagues are acutely aware of the risks and are likely to issue carefully measured guidance to navigate these challenges. This approach could invite criticism in the coming months, noted Diane Swonk, chief economist at KPMG.

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“Powell has already faced unprecedented public criticism as Fed chair, but he remains unfazed,” Swonk said, emphasizing his resilience in navigating the central bank’s role in uncertain times.

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The December meeting will likely set the tone for the Fed’s policy trajectory in 2024 and beyond. While traders and analysts anticipate rate cuts, the central bank’s cautious approach signals an acknowledgment of the economic complexities at play.

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With inflationary pressures, uncertain fiscal policies, and evolving market expectations, the Federal Reserve appears poised to tread carefully, prioritizing flexibility and responsiveness over a predetermined path. As Powell prepares to address these challenges, the Fed’s ability to balance risks and maintain economic stability will remain under scrutiny.

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