The U.S. Federal Reserve is expected to cut its benchmark interest rate by a quarter of a percentage point this week, a move some analysts are calling a “hard reversal” in monetary policy. This decision comes alongside updated economic forecasts and interest rate projections as the central bank attempts to balance its goals against a backdrop of changing economic conditions and the incoming administration of President-elect Donald Trump.
The expected rate drop would lower the Fed's key interest rate to a range of 4.25% to 4.50%, marking a full one percentage point reduction from September, when the central bank began easing policy. restrictive monetary policy. That policy was put in place to fight inflation, which has increased since 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 2025 outlook.
In its quarterly projections in September, the Fed indicated its intention to further reduce the key rate, with expectations of a full one percentage point decline by the end of 2025, putting it at around 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 about future rate cuts.
A cautious Fed in a context of economic resilience
Despite signs of slowing inflation, the U.S. economy remains strong, with growth exceeding expectations and unemployment remaining low. Data released earlier this week, including strong forecasts for November, reinforced the Fed's description of the economy as expanding at a “solid pace.” However, the central bank acknowledged that while inflation is moderating, it “remains quite high.”
Investors and analysts are now looking to Fed Chair Jerome Powell's post-meeting press conference to get a sense of the central bank's thinking. They will evaluate whether Powell and other monetary policymakers signal a slower pace of rate cuts 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 in September, while recent improvements in inflation appear to have stalled,” Swonk wrote. “The Fed needs time to pause and evaluate where we stand, especially since 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 expected rate cut. According to economists at TD Securities, although the central bank will likely maintain its projection of further rate cuts through 2025, it is expected to take 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 political uncertainty under the Trump administration. Powell is expected to underline the Fed's commitment to data-driven decisions, particularly as the economy continues to outperform previous projections.
The Fed's monetary policy statement, updated economic forecasts and Powell's remarks will likely lead to what Swonk described as “hawkish easing.” While the central bank is cutting rates, the pace of future cuts is expected to slow, reflecting a more cautious outlook.
Economic outlook under the Trump administration
Trump's return to the presidency on January 20 will add another layer of complexity to the Fed's decision-making process. His proposed tax cuts and immigration policies could have a significant impact on the US economy, creating uncertainties for monetary policymakers.
The Fed's next meeting, scheduled for January 28-29, will offer the central bank an opportunity to reassess its policy stance following Trump's inauguration. However, a Reuters poll of economists suggests the Fed is unlikely to make further rate adjustments at that meeting as it assesses the economic effects of the new administration's policies.
Of 99 economists surveyed, 58 believe the Fed will keep interest rates unchanged at its January meeting, reflecting the central bank's need for an observation period before implementing further policy changes.
Looking ahead
As the Fed prepares to release 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, moderate inflation and the uncertainties of Trump's presidency will likely keep the Fed on a cautious stance going forward.
While the expected rate cut signals continued easing of monetary policy, the slower pace of cuts suggests the Fed is carefully navigating the changing economic landscape. For now, the central bank appears committed to maintaining stability to balance growth, inflation and political uncertainty in the coming months.