The Federal Reserve meets to reduce US interest rates

The Federal Reserve (Fed) is set to cut its benchmark interest rate by a quarter of a percentage point this week, returning to the path it set to slowly reduce rates, although the economic outlook constantly changes before its eyes.

Economists who believe the Fed will cut rates say the move meets the initial rapid reduction noted in September, with cuts in three consecutive meetings. The measure would leave the Fed’s reference rate at a 4.25%-4.5% rangea decline of one percentage point from the peak in early September.

“The December FOMC meeting will mark the end of the first phase of the Fed’s rate cycle,” said Krishna Guha, vice president at Evercore ISI. And Powell will introduce the next phase in his press conference, highlighting the uncertainty, “making it clear that, although the Fed remains oriented towards reducing rates cautiously “It now enters a different, more cautious phase of policy, with a less compromised approach to the timing and extent of additional cuts,” he added.

Fed watchers said they expect a healthy debate at the meeting between officials who want to cut and those who prefer to pause. “The decision is not obvious”said former Dallas Fed President Robert Kaplan.

Kaplan said that, in the end, The Fed believes the level of rates after the cut continues to put some downward pressure on demand, thereby limiting inflation, while reducing the risk of rates causing a recession..

“Most Fed officials still believe the funds rate is well above a neutral level, which would put neither upward nor downward pressure on demand,”“But there is widespread recognition that estimates of neutral are very uncertain.”former Fed Governor Larry Meyer said in a note to clients. That makes the decision very difficult, he added.

What the market expects

Fed officials will meet on Tuesday and Wednesday and will release a policy statement at 2 pm (5 pm Argentina, as it is 3 hours ahead of Eastern Time), at the end of their meeting. Powell will follow with a news conference at 2:30 p.m.

Fed funds futures indicate that traders overwhelmingly expect the Fed to cut rates. There have been no signs from the Fed that the decision is more difficult than traders expect. “They are not going to disappoint the markets next week,” Eugenio Aleman, chief economist at Raymond James, said last week.

Stephen Stanley, chief US economist at Santander, said the market has taken cues from Powell’s recent comments. “Powell seems to be pretty relaxed about inflation,” he said.

At the meeting, the Fed will publish its latest forecast for the economy and monetary policy. Economists will be watching closely how many cuts are planned for 2025.

In September, Fed officials anticipated four quarter-point cuts in 2025, or one cut per quarter. Right now, Fed fund futures indicate that investors expect just two cuts next year. But economists don’t believe the Fed’s new economic forecast incorporates its view of Trump’s proposals.