The Fed is expected to cut rates further on Thursday. Everything you need to know

The Federal Reserve will likely stick to business when it closes its Thursday meeting with another interest rate cut, but it will keep its eyes on the future amid an environment that has suddenly become much more complicated.

Financial markets are pricing in a near certainty that the central bank’s Federal Open Market Committee will cut its benchmark borrowing cost by a quarter of a percentage point as it seeks to “recalibrate” policy for an economy that is seeing the inflation rate moderate and the labor market slowing down.

The focus, however, will be on the future of the presidency. Jerome Powell and his Fed colleagues as they navigate a changing economy – and the political earthquake of Donald Trump’s resounding victory in the presidential race.

“We believe Powell will refuse to make early judgments on the implications of the election for the economy and rates, and will seek to be a source of stability and calm,” Krishna Guha, head of global policy and central bank strategy at Evercore ISI. , said in a note published before the election result was known.

Consistent with policymakers’ historic desire to stay above the political fray, Powell will “say the Fed will take the necessary time to study the new administration’s plans” and then “refine that assessment as actual policies are developed and implemented,” Guha added. .

So while the immediate action will be to stay the course and implement the reduction, which amounts to 25 basis points, the market’s attention will likely turn to what the committee and Powell have to say about the future. The federal funds rate, which sets what banks charge each other for overnight loans but often also influences consumer debt, is currently targeted at a range between 4.75% and 5.0%. .

Market prices currently favor a further quarter-point reduction in December, followed by a pause in January, then several reductions through 2025.

But if Trump’s agenda If the tax cuts, increased spending and aggressive tariffs come to fruition, it could have a significant impact on a Fed that is trying to right-size policy after mammoth rate hikes aimed at controlling inflation. Many economists believe a new round of isolationist economic measures from Trump could revive inflation, which has remained below 3% throughout Trump’s first term despite a similar recipe.

Trump has frequently criticized Powell and the Fed during his first term, which ran from 2017 to 2021, and is in favor of low interest rates.

“Everyone is on the lookout for future rate cuts and if anything is telegraphed,” said Quincy Krosby, chief global strategist at LPL Financial. “But there is also the question of whether or not they can claim victory over inflation.”

The answers to these questions would largely be left to Powell’s press conference after the meeting.

Although the committee will release its joint decision on tariffs, it will not provide an update on its Summary of economic projectionsa document published quarterly that includes consensus updates on inflation, GDP growth and unemployment, as well as the anonymous “dot plot” of different officials’ interest rate expectations.

Beyond the January pause, there is considerable uncertainty in markets about the direction the Fed will take. The SEP will be updated next December.

“What we’re going to talk about more and more is the terminal rate,” Krosby said. “It’s going to come back into the lexicon if yields continue to rise, and it’s not completely associated with growth.”

Traders in the federal funds futures market are betting on an aggressive pace of decline that, by the end of 2025, would bring the benchmark rate into a target range of 3.75% to 4.0%, or one point percentage below the current level after September’s half-percentage. point cut. The overnight funding rate for banks is a bit more conservative, pointing to a short-term rate around 4.2% at the end of next year.

“A key question here is: What is the end point of this rate cut cycle?” said Bill English, former head of monetary affairs at the Fed and now a finance professor at the Yale School of Management. “Pretty soon, they’ll have to think about how this period of rate cuts plays out, when the economy looks pretty strong. They might want to take a pause pretty early and see how things develop.”

Powell may also be called upon to respond to the Fed’s current moves to reduce bond holdings at its banks. balance sheet.

Since beginning its efforts in June 2022, the Fed has reduced its holdings of Treasurys and mortgage-backed securities by nearly $2 trillion. Fed officials have said balance sheet shrinkage can continue even if they cut rates, although Wall Street expects the runoff to end as early as early 2025.

“They’ve been happy to put that in the background and they probably continue to do so,” English said. “But there’s going to be a lot of interest over the next few meetings. At what point are they going to make another adjustment to the pace of the second round?”