Federal Reserve Likely to Slow Rate Cuts, Adjust Projections for 2025

Federal Reserve officials are expected to reduce borrowing costs for the third consecutive meeting this week. However, they are likely to signal fewer rate cuts in 2025 than previously anticipated. This shift comes as the U.S. economy has proven more resilient than expected, with inflation easing more slowly and the labor market remaining robust.

Resilient Economy Influences Policy Shift

Recent economic data has outpaced earlier projections, prompting Fed officials to reassess their outlook. Inflation is declining at a slower pace than anticipated, while the labor market continues to outperform expectations. These factors suggest a potential shift in the trajectory of the Fed’s rate cuts moving forward.

Fed Rate-Cut Trajectory to Slow in 2025

Stronger-than-expected data raises questions about the neutral rate, where the Fed neither stimulates nor slows the economy. A more cautious approach to rate cuts is expected. Tim Duy, chief U.S. economist at SGH Macro Advisors, suggests that the Fed may need to proceed cautiously as its estimates approach the upper bound.

Rate Cut Likely, But Long-Term Projections to Adjust

The Federal Reserve is widely expected to cut its benchmark rate by a quarter percentage point this week. This would bring the federal funds rate to a target range of 4.25% to 4.5%, down from September’s starting point. Despite this reduction, the rate will remain above the 2.9% long-term median estimate indicated by officials in September.

Projections for 2024 and Beyond

The Fed’s updated economic projections are expected to show stronger growth and lower unemployment in the coming months. While most economists predict three rate cuts for 2025, some anticipate fewer. Analysts suggest that November’s core PCE inflation reading could influence the Fed’s stance on rate cuts in the near term.

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Impact of Trump’s Policies on Fed Projections

The Fed’s projections may not fully incorporate President-elect Donald Trump’s proposed policies, including those related to tariffs and deportations. Several Fed officials are waiting for more details on his plans before adjusting their growth and inflation forecasts.

Fed’s Statement and Language Adjustments

Fed officials may retain language from November, which indicated balanced risks to meeting employment and inflation goals. However, they may also signal gradual rate reductions or a potential pause in rate cuts. Analysts predict that the Fed will keep rates steady in January, depending on how officials assess economic data.

Investor Focus on Future Policy Decisions

Fed Chair Jerome Powell’s post-meeting press conference will likely provide further insight into future policy adjustments. Investors will be keen to understand whether a pause in rate cuts could occur in January and how the Fed plans to adjust its approach to rate changes in 2025.