Fed to Cut Rates Amid Hawkish Signals for 2025

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The Federal Reserve is expected to reduce borrowing costs on Wednesday, a move some analysts describe as a "hawkish cut," as it coincides with policymakers updating their interest rate projections and economic forecasts for the early months of the Trump administration.

The anticipated 0.25% rate cut would bring the central bank’s benchmark interest rate to a range of 4.25%-4.50%, marking a full percentage point decrease since September when the Fed began easing its restrictive monetary policy aimed at curbing inflation that surged in 2021.

However, the pace and extent of further rate cuts in 2025 remain uncertain. Inflation remains above the Fed's 2% target, economic growth has exceeded expectations, and the incoming administration’s policies on tariffs, taxes, and immigration could reshape the economic outlook in unpredictable ways. 

In September, Fed officials projected reducing the benchmark rate by an additional percentage point to about 3.4% by the end of 2025. Yet, following persistent inflationary pressures and Donald Trump’s victory in the Nov. 5 presidential election, markets now anticipate a more moderate approach, with only a 0.5% cut next year. Investors will scrutinize the Fed’s updated projections and Chair Jerome Powell’s remarks during the post-meeting press conference for signs of any shifts in the central bank's stance.

“While the Fed will likely maintain its forecast for further easing in 2025, its guidance on the pace of rate cuts will probably adopt a more cautious tone,” economists at TD Securities commented ahead of the two-day meeting.

The Fed’s policy statement and revised economic forecasts will be released at 2 p.m. EST (1900 GMT), followed by Powell’s press conference at 2:30 p.m. Recent data, such as a robust retail sales report for November, reinforce the Fed’s assessment of an economy growing at a "solid pace" with low unemployment. However, inflation, though declining, "remains somewhat elevated," as noted in the Fed’s previous policy statement.

Diane Swonk, chief economist at KPMG, expects a "hawkish cut" with a slower trajectory of rate reductions moving forward. She noted that the economy is performing better than expected since the rate-cut cycle began, while progress on inflation has stagnated. "The Fed will likely want to pause and reassess the situation, especially with a new administration set to take office," Swonk said.

President-elect Trump will be inaugurated on Jan. 20, just ahead of the Fed's next meeting on Jan. 28-29. A Reuters poll of economists suggests the central bank may skip a rate cut at that meeting, with 58 of 99 respondents expecting policymakers to take time to evaluate evolving economic conditions.

 

 

 

 

 

 

 

 

 

 

 

 

 

Paraphrasing text from "Reuters" all rights reserved by the original author.