The U.S. Federal Reserve is widely anticipated to reduce its benchmark interest rate by a quarter of a percentage point this week, a move some analysts are calling a “hard-line reversal” in monetary policy. This decision comes alongside updated economic forecasts and interest rate projections as the central bank attempts to balance its objectives amid shifting economic conditions and the incoming administration of President-elect Donald Trump.
The expected rate decrease would lower the Fed’s key interest rate to a range of 4.25%-4.50%, marking a full percentage-point reduction since September when the central bank began easing its restrictive monetary policy. That policy had been in place to combat inflation, which surged starting in 2021.
The decision to cut rates reflects the Fed’s attempt to manage an increasingly uncertain economic environment. Inflation remains below the Fed’s 2% target, the economy continues to outperform expectations, and the potential impact of Trump’s tax and immigration policies adds an additional layer of unpredictability to the outlook for 2025.
In its September quarterly projections, the Fed had indicated plans to reduce the benchmark rate further, with expectations of a full percentage-point decline by the end of 2025, placing it at approximately 3.4%. However, with inflationary pressures easing and Trump’s election victory reshaping the economic outlook, investors are now focusing on how cautious the Fed will be with future rate cuts.
A cautious Fed amid economic resilience
Despite signs of slowing inflation, the U.S. economy remains robust, with growth exceeding expectations and unemployment remaining low. Data released earlier this week, including strong November forecasts, has reinforced the Fed’s description of the economy as expanding at a “solid pace.” However, the central bank has acknowledged that while inflation is moderating, it “remains somewhat elevated.”
Investors and analysts are now looking to Fed Chair Jerome Powell’s post-meeting press conference for insights into the central bank’s thinking. They will scrutinize whether Powell and other monetary policymakers signal a slower pace of rate reductions going forward.
Diane Swonk, chief economist at KPMG, noted that the Fed faces a delicate balancing act. “The economy continues to be stronger than participants expected back in September, while recent improvements in inflation appear to have stalled,” Swonk wrote. “The Fed needs time to pause and assess where we stand, especially as the incoming administration could significantly alter the economic landscape.”
A “hawkish” approach to easing
Economists expect the Fed to signal a more cautious approach despite the anticipated rate cut. According to TD Securities economists, while the central bank will likely maintain its projection of further rate reductions through 2025, it is expected to adopt a more measured tone regarding the pace of future cuts.
This cautious stance reflects the Fed’s need to balance economic resilience with potential risks from inflation and policy uncertainty under the Trump administration. Powell is expected to emphasize the Fed’s commitment to data-driven decisions, particularly as the economy continues to outperform earlier projections.
The Fed’s monetary policy statement, updated economic forecasts, and Powell’s remarks will likely result in what Swonk described as a “hawkish easing.” While the central bank is reducing rates, the pace of future cuts is expected to slow, reflecting a more cautious outlook.
Economic outlook under Trump’s administration
Trump’s return to the presidency on January 20th will add another layer of complexity to the Fed’s decision-making process. His proposed tax cuts and immigration policies could significantly impact the U.S. economy, creating uncertainties for monetary policymakers.
The Fed’s next meeting, scheduled for January 28-29, will provide an opportunity for the central bank to reassess its policy stance after Trump takes office. However, a Reuters poll of economists suggests the Fed is unlikely to make further rate adjustments at that meeting, as it evaluates the economic effects of the new administration’s policies.
Of the 99 economists surveyed, 58 believe the Fed will hold interest rates steady at the January meeting, reflecting the central bank’s need for a period of observation before implementing additional policy changes.
Looking ahead
As the Fed prepares to issue its latest monetary policy statement, all eyes will be on Powell and his remarks for clues about the central bank’s outlook. The combination of a strong economy, moderating inflation, and the uncertainties of Trump’s presidency will likely keep the Fed in a cautious posture moving forward.
While the anticipated rate cut signals a continued easing of monetary policy, the slower pace of reductions suggests the Fed is carefully navigating the evolving economic landscape. For now, the central bank appears committed to maintaining stability as it balances growth, inflation, and political uncertainty in the months ahead.
