The Fed is about to deliver the last rate cut for a while
Washington
CNN
—
The Federal Reserve on Wednesday is expected to cut interest rates for the third time this year, in what could be the last rate cut for months.
The US economy remains resilient, with the job market holding steady and economic growth forging ahead. But inflation's progress to the Fed's 2% target may have stalled in recent months. Put together, economic figures show the Fed doesn't need to be in any rush to lower borrowing costs after this week, a stance communicated by the Fed's leader recently.
"We can afford to be a little more cautious," Fed Chair Jerome Powell said in New York earlier this month. "I feel very good about where the economy is and where monetary policy is."
Powell will address reporters in a news conference at 2 p.m. ET. Investors will be listening closely for hints that the Fed is leaning toward holding rates steady in the coming months.
Fed officials will also release a fresh set of economic forecasts, likely reflecting fewer rate cuts in 2025 than previously anticipated. In September, officials penciled in four rate cuts for next year.
The Fed began to cut rates in September, starting with a bold half-point cut. Powell said the move reflected the Fed's commitment to preserving the labor market's health, appeasing some investors who feared unemployment could soon take off.
That turned out to not be the case; both the economy and job market remain on solid footing, which Powell noted in his New York speech. Still, Wall Street is fully expecting the Fed to follow through with another quarter-point rate cut this week.
"Fed officials are in a really awkward spot with this rate cut," Karl Schamotta, chief market strategist at Corpay, told CNN.
So, why is the Fed cutting?
The Fed's key interest rate influences borrowing costs across the economy and it's used to achieve stable prices and maximum employment, two key goals mandated by Congress. The central bank raises interest rates whenever it needs to cool the economy to get inflation under control.
With inflation nearly back to the Fed's target, plus a cooling job market, officials have been trying to recalibrate policy to make sure that high borrowing costs don't inflict undue damage to the economy. The two rate cuts so far were just the beginning of that process.
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"I believe the evidence is strong that policy continues to be significantly restrictive and that cutting again will only mean that we aren't pressing on the brake pedal quite as hard," Fed Governor Christopher Waller said at event in Washington, DC, early this month. "Another factor that supports a further rate cut is that the labor market appears to finally be in balance, and we should aim to keep it that way."
The US labor market remains in good shape, with unemployment still at historically low levels and employers continuing to add jobs, though it has become harder for job seekers to find work. The number of people who've been unemployed for more than 26 weeks rose in November to the highest level in nearly three years.
"The labor market has weakened somewhat and inflation is expected to be very benign during the first two quarters of next year, which is why they are cutting again," Eugenio Aleman, chief economist at Raymond James, told CNN. "But after that, the picture is not as rosy."
The elephant in the room is President-elect Donald Trump's second term, which starts on January 20, 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.
But there are still many knowns, such as which specific goods will be tariffed and the duration of any new duties. Fed officials will eventually factor in to their economic models any expected changes in trade policies once they are fully fleshed out and set it motion.
Early signs of inflation stalling?
Inflation data has showed limited progress in recent months.
The closely watched Consumer Price Index rose 2.7% in the year ending in November, accelerating from October's 2.6% annual increase and marking the highest annual rate since July. The annual figure was in line with economists' expectations.
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Meanwhile, the Producer Price Index, which captures prices at the factory gate, jumped 0.4% on a monthly basis and 3% for the 12 months ended in November, reflecting a sharp pick-up from October.
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 likely won't deter the Fed from delivering this year's third rate cut, but they are likely to underscore the bumpiness of inflation's path toward 2%. More of the same could force officials to acknowledge that further progress on inflation has stalled, which they did early this year, keeping interest rates steady until the tide turns.
The quarterly "dot plot," which shows Fed officials' projections on rate moves, could give the best signal on what to expect from the central bank in 2025.
