Topline
The Federal Reserve is highly likely to roll out its third consecutive interest rate cut later Wednesday, according to economists and financial markets, though perhaps more compelling is what the U.S. central bank will signal about its monetary policy ambitions in 2025.
Federal Reserve Board Chairman Jerome Powell addresses reporters.
Key Facts
The Federal Open Market Committee will announce at 2 p.m. EDT whether the panel decided to adjust the target federal funds rate, nominally known as interest rates as the Fed-determined rate widely impacts borrowing costs throughout the country.
Economists at the world’s three largest investment banks – Bank of America, Goldman Sachs and JPMorgan Chase – all predict the Fed will lower rates by 25 basis points from 4.5%-4.75% to 4.25%-4.5%.
That would bring rates down to their lowest level since February 2023, down a full percentage point from the 5.25%-5.5% range they sat from July 2023 through September.
Traders largely agree, as derivative contracts betting on monetary policy decisions priced in a 98.8% chance of a 25 basis-point cut Wednesday, compared to just 1.2% of a hold, according to CME Group’s FedWatch Tool.
Will Interest Rates Come Down Further In 2025?
There’s a clear consensus on what the Fed will announce about its immediate rate decision Wednesday, but it will also release its quarterly economic projections. That includes where each central banker expects interest rates to end up in 2025. Economists at BofA, Goldman and JPMorgan expect the median projection to shrink from the prior forecast of four 25 basis-point cuts next year to three, projecting an end-of-2025 target range of 3.5%-3.75%. The market is less convinced about even that slower pace of cuts, with the FedWatch Tool ascribing 3.75%-4% and 4%-4.25% as the most likely outcomes by the end of next year. Regardless, it’s clear Americans will need to get used to higher rates over the longer term, with rates highly likely to remain above 3% for an extended period, a threshold that was never hit between 2009 and 2021.
What To Watch For
If Fed Chairman Jerome Powell divulges any thoughts about the incoming presidential administration’s impact on the central bank at his afternoon press conference, a hot-button topic following campaign trail comments from President-elect Donald Trump teasing a threat to Fed independence. “There will probably be plenty of questions about the election and what it means for Fed policy and Fed independence, though we doubt we’ll learn much from that discussion,” according to JPMorgan’s chief U.S. economist Michael Feroli.
Big Number
2.3%. That’s how much the Fed’s favored inflation metric, the core personal consumption expenditures index, was in October, its most recent reading. That’s awfully close to the Fed’s 2% target, hinting at the central bank’s pivot beginning in September, when it delivered a supersized 50 basis-point cut. The Fed first began raising rates this cycle in 2022 when core PCE inflation peaked at a multidecade high of more than 5%. But Goldman’s baseline forecast calls for core PCE inflation to increase by 30 to 40 basis points due to the tariffs touted by Trump, noted the bank’s chief U.S. economist David Mericle.
Crucial Quote
“The FOMC might worry that delivering too many cuts could look inappropriate in hindsight if tariffs boost inflation meaningfully and might therefore prefer to wait for clarity about what is coming,” wrote Mericle.
Further Reading
