The Fed is likely to announce another rate cut and announce policy for 2025

Topline

The Federal Reserve will most likely introduce its third straight interest rate cut later Wednesday, according to economists and financial markets, although perhaps more convincing is what the Federal Reserve will signal about its monetary policy ambitions in 2025.

Important facts

Will interest rates continue to fall in 2025?

There is a clear consensus on what the Fed will announce on Wednesday regarding its immediate interest rate decision, but it will also release its quarterly economic forecasts. This includes where every central banker expects interest rates to end in 2025. Economists at BofA, Goldman and JPMorgan expect the median forecast to shrink to three by the end of the year from the previous forecast of four 25 basis point cuts next year. Target range for 2025: 3.5%-3.75%. The market is less confident about even this slower pace of cuts, with the FedWatch tool indicating 3.75% to 4% and 4% to 4.25% as the most likely outcomes by the end of next year. Regardless, it is clear that Americans will have to get used to higher interest rates in the longer term, as interest rates will most likely remain above 3% for an extended period of time, a threshold that was never reached between 2009 and 2021.

What you should pay attention to

Whether Fed Chairman Jerome Powell will offer any thoughts at his afternoon news conference about the impact of the new presidential administration on the central bank, a hot topic after President-elect Donald Trump touted a threat to the Fed’s independence on the campaign trail. “There will likely be many questions about the election and what it means for Fed policy and Fed independence, although we doubt we will learn much from this discussion,” said Michael Feroli, chief U.S. economist at JPMorgan.

Big number

2.3%. That’s how high the Fed’s preferred inflation measure, the core index of personal consumption spending, was in October, its last reading. That’s very close to the Fed’s 2 percent target, suggesting the central bank began a turnaround in September when it delivered an outsized 50 basis point rate cut. The Fed began raising rates for the first time this cycle in 2022, when core PCE inflation peaked at a multi-decade high of more than 5%. However, Goldman’s baseline forecast is for core PCE inflation to rise by 30 to 40 basis points due to tariffs touted by Trump, noted the bank’s chief U.S. economist David Mericle.

Crucial quote

“The FOMC may fear that too many cuts could seem inappropriate in retrospect if tariffs significantly boost inflation and may therefore prefer to wait for clarity on what is coming,” Mericle wrote.

Further reading

ForbesJerome Powell says he is “not concerned” about the Federal Reserve’s independence under TrumpFrom Derek Saul

ForbesThe Fed is leaning toward “gradual” future rate cutsFrom Derek Saul