[The Federal Reserve is expected to cut interest rates for the third time this year, but it may be the last rate cut for months. The US economy remains resilient, with a strong job market and economic growth, but inflation has stalled in recent months. Fed Chair Jerome Powell has said that the economy is in good shape and that the central bank can afford to be cautious.
Investors will be listening closely to Powell’s comments during a news conference on Wednesday, as well as the release of fresh economic forecasts. The forecasts are likely to show fewer rate cuts in 2025 than previously anticipated.
The Fed began cutting rates in September, with a bold half-point cut, to preserve the labor market’s health. However, the economy and job market have remained strong, and Wall Street is fully expecting another quarter-point rate cut this week.
Fed officials are trying to recalibrate policy to ensure that high borrowing costs don’t inflict undue damage on the economy. The two rate cuts so far have been the beginning of that process.
The labor market remains in good shape, with unemployment at historically low levels and employers continuing to add jobs. However, the number of people who’ve been unemployed for more than 26 weeks has risen to the highest level in nearly three years.
The elephant in the room is President-elect Donald Trump’s second term and how his proposed policies could affect the US economy. The potentially massive tariffs he’s floated for goods coming from Mexico, Canada, and China are widely expected to eventually push up inflation, which could keep the Fed from cutting rates or even lead to a hike instead.
Inflation data has shown limited progress in recent months, with the Consumer Price Index rising 2.7% in the year ending in November. The Producer Price Index jumped 0.4% on a monthly basis and 3% for the 12 months ended in November.
The Fed’s preferred inflation measure, the Personal Consumption Expenditures price index, is due Friday and could similarly show stubborn price pressures. The latest inflation figures may not deter the Fed from delivering this year’s third rate cut, but they could underscore the bumpiness of inflation’s path toward 2%.
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