The Federal Reserve will most likely slash borrowing costs in their upcoming meeting, with economic data potentially affecting future interest rate decisions. Recent market assessments imply a 97% probability that the Federal Reserve will lower the fed funds rate by a quarter percentage point to between 4.25% and 4.5%, according to the CME Group's FedWatch tool.
Going into the new year, we might see fewer rate reductions. Despite inflation remaining stubbornly above the Fed's annual goal of 2%, and jobs being relatively abundant, the justifications for rate cuts have receded. After a year-long period of maintaining a two-decade peak to mitigate post-pandemic inflation, the Fed lowered its benchmark interest rate in September and November.
The fed funds rate affects interest rates on credit cards, automotive loans, and business loans. The current high rates are designed to function like sand in the economic gears, discouraging borrowing and therefore reducing inflation pressures. However, the Fed's mission isn't just to combat inflation, but to avert drastic unemployment too. A recent dip in the job market made the Fed more worried about the latter aspect of their mission, thus motivating a sharp 50-point rate cut in September.
What remains unclear about Wednesday's meeting is how the Fed will weigh its two prickly interests in its upcoming rate-cut plans. Additionally, speculations are rife about what Fed Chairman Jerome Powell will discuss concerning the future in the post-meeting press conference.
When the Fed's policymakers last made economic projections in September, they expected to lower the rate to between 3.25% and 4.5% by the end of 2025, a whole percentage point lower than the predicted level by end of this year.
The incoming Trump administration further muddles future projections. The economy's trajectory and inflation could be influenced by President Donald Trump's economic agenda, particularly his plan to impose heavy tariffs on U.S. trading partners once he assumes office.
The possible implications for the Fed are further complicated as tariffs could deal a blow to U.S. businesses and economic growth, which would prompt the Fed to cut rates to stimulate business activity and safeguard the labor market. As a result of these unresolved issues, the Fed could adopt a more cautious approach regarding future rate cuts.