On September 18, 2024, Federal Reserve Chairman Jerome Powell addressed the media after a two-day meeting of the Federal Open Market Committee (FOMC) regarding interest rate policies in Washington, U.S. (Reuters/Tom Brenner)
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As the Federal Reserve approaches the conclusion of Thursday’s meeting, it is expected to maintain its current focus with a rate cut, though it is also paying close attention to the evolving economic landscape.
The central bank is preparing for adjustments in financial markets, anticipating a slight reduction in benchmark borrowing costs of a quarter percentage point amidst moderate inflation and a steady labor market. This action seems likely to create a gentle adjustment in the economic climate.
However, discussions will soon shift to future implications for Chairman Jerome Powell and his colleagues as they navigate a newly complex economic environment, influenced by Donald Trump’s unexpected victory in the presidential election.
According to Krishna Guha, head of global policy and central banking strategy at Evercore ISI, “Powell is cautious about predicting the election’s impact on economic indicators and interest rates; he aims to provide a sense of stability and reassurance,” as noted in a memo released prior to the election outcomes.
In light of policymakers’ historical inclination to sidestep political disputes, Chairman Powell emphasized, “The Fed will require adequate time to evaluate the new administration’s intentions.” He indicated this assessment would evolve along with the plans set forth by the administration, as Guha highlighted.
While the immediate response will involve a 25-basis-point rate cut, market attention is likely to pivot towards insights from the committee and Chairman Powell regarding future strategies. The federal funds rate, which dictates banks’ overnight lending rates and influences consumer borrowing costs, currently resides in the 4.75% to 5.0% range.
Market expectations indicate another quarter-point reduction in December, a pause in January, followed by multiple cuts throughout 2025.
Preparing for President Trump’s Administration
Should President Trump’s proposed policies, such as tax cuts, increased spending, and strong tariffs, come to fruition, they could substantially affect the Federal Reserve. After a period of significant interest rate hikes aimed at combating inflation, the Fed must now adapt its approach. Many economists warn that Trump’s isolationist economic policies might lead to renewed inflation, even though his first term saw inflation rates not exceeding 3.3%.
Throughout his first term from 2017 to 2021, Trump often criticized Powell and the Federal Reserve, advocating for lower interest rates.
“Everyone is anticipating future rate cuts and what signals may emerge,” stated Quincy Crosby, chief global strategist at LPL Financial. “But we must also ponder whether we’ve successfully addressed inflation.”
The answers to these inquiries will largely hinge on Powell’s press conference following the meeting.
The committee is set to release a unified decision regarding interest rates, while the anticipatory document “Summary of Economic Forecasts,” which contains consensus updates and anonymous “dot plots” related to inflation, GDP growth, and unemployment rates, is not expected to provide updated forecasts on interest rates from each member.
Market sentiment remains uncertain about the Fed’s direction post-January pause. The SEP is slated for its next update in December.
“We’re likely to hear more regarding terminal interest rates,” Crosby stated. “If yields continue rising, this terminology will resurface, though it doesn’t solely correlate with economic growth.”
Where Will It All End?
Traders involved in the federal funds futures market are forecasting a rapid series of rate cuts, projecting the benchmark rate to fall within the 3.75%-4.0% range by the conclusion of 2025, a notable drop from the 0.5% rate established in September.
“The critical question is: Where will this cycle of rate reductions conclude?” questioned Bill English, a former Fed monetary chief now teaching at Yale School of Management. “Officials must contemplate where they foresee a shift in this rate-cutting cycle, especially given the robust economic outlook.”
Powell may also need to address the Fed’s ongoing strategy of winding down its bond portfolio.
Since initiating this strategy in June 2022, the Fed has decreased its holdings of U.S. Treasuries and mortgage-backed securities by nearly $2 trillion. Officials have indicated that balance sheet reduction may persist alongside rate cuts, yet Wall Street anticipates this will wrap up by early 2025.
