Fed Poised for 25bp Rate Cut: FOMC to Lower Rates to 4.5% Amid Inflation Concerns
The Federal Reserve is widely expected to announce a 25-basis-point interest rate cut on Wednesday, marking the third reduction this year.
This would lower the benchmark rate to a range of 4.25% to 4.5%, despite persistent inflation and robust economic performance.
While the economy is expanding at a solid 3% annual rate and the labor market remains resilient, inflation remains a concern. The Fed’s preferred gauge, the Personal Consumption Expenditures (PCE) Index, is projected to rise to 2.5% in November, with the core reading—excluding food and energy—hovering around 2.9%.
Traders, however, have priced in the cut with near certainty:
- 97% probability of a rate cut, per the CME FedWatch Tool.
- Markets eagerly await updated Fed “dot plot” projections to gauge the path of future rate changes.
Inflation, Jobs, and a Hawkish Fed Outlook
The rate cut is not without controversy. Former Kansas City Fed President Esther George argues for caution, saying the Fed should wait and monitor data before further easing. She highlights concerns that inflation, while off its 2022 peaks, has stalled between 2.5% and 3%, above the Fed’s 2% target.
“If inflation isn’t decelerating further, why rush to cut rates?” George said in an interview.
Other officials have pushed back against aggressive easing, wary of overstimulating the economy. Yet proponents argue that overly restrictive rates could eventually damage the labor market—one of the strongest pillars of the economy.
Fed Chair Jerome Powell’s press conference will be critical:
- Powell is expected to balance concerns about inflation with maintaining growth.
- Analysts anticipate a “hawkish cut”, where the Fed reduces rates but signals caution about future cuts.
Vincent Reinhart, Chief Economist at BNY Mellon, said, “The Fed will emphasize a cautious approach, hinting at the possibility of skipping future meetings before deciding on further cuts.”
Key Tools to Watch: Dot Plot and Powell’s Guidance
The Fed has several tools to clarify its stance and guide market expectations:
- The Dot Plot: Updated projections of individual Fed members’ rate expectations for 2025 and beyond.
- September’s projections showed four rate cuts next year; markets now expect only two cuts.
- Forward Guidance: The post-meeting statement may signal a slower pace of easing in 2025.
- Powell’s Press Conference: Comments on inflation, growth, and future policy will shape investor sentiment.
What About Fiscal Policy? Trump and Inflation Risks
The Fed also faces uncertainty surrounding fiscal policies under a potential Trump administration. Proposals for tax cuts, tariffs, and mass deportations could stoke inflationary pressures, forcing the Fed to adapt its monetary policy outlook.
Economists remain cautious:
- Aggressive fiscal spending could lift economic growth but trigger higher inflation.
- The Fed may delay forecasts until these policies are closer to reality.
What to Expect on Wednesday
The Fed’s balancing act—supporting growth while controlling inflation—will be on full display:
- Rate Decision: A 25-basis-point cut to 4.25%-4.5%.
- Inflation Projections: Likely to rise slightly, reflecting sticky inflation data.
- Policy Outlook: Fewer rate cuts in 2025 than previously projected.
Conclusion: A Hawkish Rate Cut in Focus
The Fed is expected to deliver a rate cut while maintaining a cautious tone about the future, ensuring markets don’t get ahead of the central bank’s plans. Powell’s comments and the updated dot plot will be pivotal in determining the direction of monetary policy heading into 2025.
Key Takeaways for Readers:
- A 25-basis-point cut is almost certain.
- Inflation remains a key hurdle for more aggressive easing.
- Powell’s tone and projections will set expectations for next year.
Investors and analysts alike will be watching closely as the Fed charts its path in a challenging economic landscape.
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