The Federal Reserve is set to meet on December 17-18, and financial markets are predicting a likely interest rate cut. Officials may also provide insights into how recent economic data could influence their decisions on interest rates in the coming year.
According to the CME Group's FedWatch tool, which tracks rate expectations based on futures trading, there is a 97% chance that the Federal Reserve will reduce the federal funds rate by a quarter percentage point, bringing it to a range of 4.25% to 4.5%. However, these rate cuts are expected to be fewer and less frequent in 2025.
The Fed’s Reasoning Behind Rate Cuts
The Federal Reserve has reduced interest rates twice recently, in September and November, after keeping rates at a two-decade high for over a year. These measures were initially taken to curb inflation, which spiked after the pandemic. The goal was to lower inflation to 2% annually, but inflation has remained persistently above this target, despite the rate hikes. Additionally, jobs remain relatively plentiful, indicating a steady labor market.
The Fed’s current strategy of high rates is designed to slow economic activity, reducing borrowing and spending to ease inflationary pressures. This has impacted interest rates on credit cards, auto loans, and business loans, effectively “putting sand in the gears” of the economy.
Balancing Inflation and Unemployment
The Federal Reserve’s dual mission is to tackle inflation while ensuring the job market remains stable. Earlier in the year, a slowdown in hiring raised concerns about the labor market, prompting a larger-than-expected rate cut in September. While employers have been hiring at a slower pace, there have been no major layoffs, keeping unemployment levels in check.
In the December 17 meeting, economists will be closely watching how the Fed balances these two priorities — controlling inflation and preventing job losses. While the rate cut this month is largely anticipated, the outlook for future cuts remains uncertain.
The Wildcard: Trump’s Economic Policies
The potential impact of Donald Trump’s presidency adds another layer of uncertainty to the Fed’s decision-making. Trump's economic policies, particularly his stance on tariffs, could influence inflation and the economy. The president-elect has proposed imposing heavy tariffs on U.S. trading partners, which could lead to higher prices for goods as businesses pass these costs onto consumers.
Economists are divided on how severe these tariffs will be and how they might impact the economy. While some predict inflation will rise, others believe these policies could harm U.S. businesses, potentially slowing economic growth. If this happens, the Fed might be forced to cut rates to help stimulate the economy and preserve jobs.
