By: Shatha kalel
The Federal Reserve appears set to continue its recent strategy of modest rate cuts, likely implementing another quarter-point reduction as it wraps up its latest policy meeting. This decision, aimed at fine-tuning monetary policy, comes as economic indicators suggest moderating inflation and a softening labor market. However, this course of action is set against a dynamic and unpredictable backdrop, including a politically charged environment following Donald Trump’s election victory. As financial markets closely monitor the Federal Reserve’s moves, the potential long-term impact of these decisions on the economy warrants a closer look.
Market Expectations and the Likely Path for Interest Rates
Financial markets are currently almost certain that the Fed’s Open Market Committee (FOMC) will reduce the benchmark borrowing rate by 0.25%. This decision marks an effort to maintain a balanced approach in a mixed economic landscape. The Fed’s objective appears to be “recalibrating” the economy — tempering inflation without overburdening the labor market.
However, the focus is less on this immediate cut and more on the Fed’s next steps. Chair Jerome Powell and his team face an uncertain road ahead as they navigate possible policy shifts from Trump’s proposed economic agenda, which includes tax cuts, increased spending, and trade protectionism. While Powell is expected to maintain a non-partisan stance, analysts believe that his primary focus will be providing economic stability. According to Krishna Guha, head of global policy at Evercore ISI, Powell is likely to avoid speculating on the implications of Trump’s policies, waiting instead until specific legislative steps are introduced.
Implications of the Interest Rate Cut for Consumers and Markets
The Fed’s anticipated rate cut will likely influence a range of consumer and business financial behaviors. With the target range for the fed funds rate now expected to settle between 4.75%-5.0%, the effects will reverberate across consumer credit markets, impacting rates on everything from mortgages to credit card debt. A lower interest rate environment generally spurs borrowing and investment as cheaper capital becomes available to consumers and businesses alike.
The Trump Effect: Economic Policy and Inflation Risks
If President Trump’s economic agenda takes shape, its effects could be significant. A blend of tax reductions, government spending, and tariffs may spur domestic growth initially but could also stoke inflationary pressures, challenging the Fed’s current rate-cutting approach. During Trump’s previous term, despite comparable policies, inflation remained below 3%. However, with inflation more volatile and global supply chains still rebalancing, a renewed push toward protectionism could prompt price increases across various sectors.
Quincy Krosby, chief global strategist at LPL Financial, highlights a key question: Can the Fed consider inflation “under control”? If inflationary pressures do build, it could force the Fed into a delicate balancing act between rate cuts and rate hikes, depending on economic stability.
The Fed’s Broader Economic Outlook and Market Predictions
The Fed’s announcement won’t include an update on its Summary of Economic Projections (SEP), which outlines predictions for inflation, GDP, and employment. However, in December, when these projections are revisited, economists will be particularly interested in the so-called “terminal rate” — the highest rate in the Fed’s current cycle of hikes and cuts.
Current market forecasts suggest a tapering off of rate cuts after December, with a pause in January and potential cuts again in 2025. Futures markets predict that the Fed’s policy rate will end 2025 in a range between 3.75%-4.0%, reflecting cautious optimism about economic stability. Bill English, former head of monetary affairs at the Fed, underscores that the institution will need to assess its terminal rate target soon, especially as yields remain high amid growth concerns.
Looking Ahead: Navigating Economic Uncertainty
The Fed’s rate-cutting strategy represents a balancing act as it attempts to guide the economy through uncertain times. With the labor market softening, inflation moderating, and a shifting political landscape, Powell and the Fed face a complex challenge in determining the long-term path for interest rates. Should Trump’s policies reignite inflationary pressures, the Fed may find itself needing to reverse its current easing stance, adding yet another layer of complexity.
In summary, while another quarter-point rate cut is expected to be announced, it is the Fed’s longer-term strategy that will captivate markets and investors. The balance between economic support and inflation management remains fragile, and the Fed’s decisions over the coming months will be pivotal in setting the trajectory for the U.S. economy. As Powell and his colleagues work to maintain stability, their actions will likely play a critical role in determining whether the economy can weather both political and economic uncertainties.
Economic Unit/North America Office
Al Rawabet Center for Research and Strategic Studies