The Fed is likely to cut rates again on Thursday. Everything you need to know

The Fed will likely stick to its immediate business when it ends Thursday’s meeting with another rate cut, but it will look to the future against a backdrop that has suddenly become much more complex.

Financial markets will “recalibrate” policy towards an economy with moderate inflation and a stable labor market, with the central bank’s Federal Open Market Committee cutting benchmark borrowing costs by a quarter of a percentage point. It is almost certain that Make it soft.

But the focus will turn to what lies ahead for Chairman Jerome Powell and his Fed colleagues as they navigate a changing economy, and the political earthquake of Donald Trump’s stunning victory in the presidential election.

“Powell refuses to make early judgments about the election’s impact on the economy and interest rates and seeks to be a source of stability and calm,” said Krishna Guha, head of global policy and central banking strategy at Evercore ISI. I’m thinking about it,” he said. said the memo, which was issued before the election results were known.

Given policymakers’ historic desire to avoid political fights, Chairman Powell said, “The Fed will take the time necessary to consider the new administration’s plans,” before adding, “The Fed will take the time necessary to consider the new administration’s plans.” We will refine this assessment as it is developed and implemented,” Guha added. .

So while the immediate action will be to stay the course and implement a rate cut worth 25 basis points, the market’s attention will likely shift to what the committee and Chairman Powell have to say about the future. The federal funds rate, which sets the interest rate banks charge each other for overnight loans and often affects consumer debt, is currently targeted at a range of 4.75% to 5.0%. are.

Market prices currently support another quarter-point rate cut in December, followed by a pause in January, followed by multiple rate cuts through 2025.

However, if President Trump’s policies of tax cuts, spending increases and aggressive tariffs come to fruition, they could have a significant impact on the Federal Reserve, which is trying to adjust its policy after massive interest rate hikes aimed at curbing inflation. Many economists believe President Trump’s new isolationist economic policies could reignite inflation, and despite a similar recipe, inflation remained at 3.3% throughout Trump’s first term. remained below %.

Trump frequently criticized Powell and the Fed during his first term, which ran from 2017 to 2021, and supported low interest rates.

“Everyone is looking at future rate cuts and whether there will be any telegrams sent,” said Quincy Crosby, chief global strategist at LPL Financial. “But there is also the question of whether we can declare victory on inflation.”

The answers to these questions will largely depend on Powell’s post-meeting press conference.

The committee is expected to issue a joint decision on interest rates, but the quarterly document “Summary of Economic Forecasts,” which includes consensus updates and anonymous “dot plots” on inflation, GDP growth, and unemployment rates, We do not plan to provide the latest information. Interest rate forecasts of each official.

There is considerable uncertainty in the market about where the Fed will go beyond the January hiatus. SEP will next be updated in December.

“What we’re going to hear more and more about is terminal interest rates,” Crosby said. “If yields continue to rise, this will come back into the lexicon, but it’s not entirely correlated with growth.”

Traders in the federal funds futures market are betting on an aggressive pace of rate cuts, with the benchmark rate reaching its target range of 3.75%-4.0% by the end of 2025, or from 0.5% in September to its current level. will reach a lower level. point cut. Interest rates on secured overnight loans to banks are somewhat cautious, suggesting that short-term interest rates will be around 4.2% at the end of next year.

“The key question here is: Where does this rate-cutting cycle end?” said Bill English, a former Fed monetary chief and now a professor of finance at the Yale School of Management. “They need to think about where they think this rate cut period is going to change pretty soon, with the economy looking pretty strong. You might want to see it.”

Mr. Powell may also be asked to address the Fed’s current efforts to reduce bond holdings on its balance sheet.

Since launching this initiative in June 2022, the Fed has reduced its holdings of U.S. Treasuries and mortgage-backed securities by nearly $2 trillion. Fed officials have said balance sheet reduction can continue even as rates are cut, but Wall Street expects the deal to be concluded as early as early 2025.

“They’re content to kind of leave things percolating in the background, and they’ll probably continue to do that,” English said. “But there will be a lot of interest in the next few meetings. At what point will we further adjust the pace of the runoff?”