Federal Reserve Chairman Powell holds a press conference after the two-day interest rate policy meeting in Washington, the United States, on September 18, 2024.
Tom Brenner | Reuters
The Fed will likely stick to the matter at hand when it wraps up its meeting on Thursday and cuts interest rates again, but it will look to the future amid a suddenly more complicated backdrop.
Financial markets expect the Federal Open Market Committee to cut benchmark borrowing costs by a quarter of a percentage point as it seeks to “recalibrate” policy in an economy with tame inflation and an improving labor market.
However, the focus will turn to the future of Chairman Powell and his colleagues at the Federal Reserve as they deal with changes in the economy and the political earthquake caused by Donald Trump’s stunning victory in the presidential election.
“We believe Powell will resist making any early judgments on the election’s impact on the economy and interest rates and will seek to be a source of stability and calm,” said Krishna Guha, head of global policy and central bank strategy at Evercore ISI, published ahead of the election results. said in a note.
Guha added that in keeping with policymakers’ historical desire to stay out of the political fray, Powell “will indicate that the Fed will take time to study the new administration’s plans” and then “refine that assessment as actual policy is developed and enacted.”
So while the immediate action would be to stay the course and deliver the equivalent of a 25 basis point rate cut, market attention will likely turn to the committee and Powell’s views on the future. The federal funds rate determines what banks charge for overnight loans but also often affects consumer debt, with the current target range being between 4.75%-5.0%.
Markets are currently pricing in another 25 basis point rate cut in December, followed by a pause in January and then multiple cuts through 2025.
Prepare for Trump
Trump frequently criticized Powell and the Fed during his 2017-21 term and supported low interest rates.
“Everyone is looking at future rate cuts and whether there is any news,” said Quincy Krosby, chief global strategist at LPL Financial. “However, there is also the question of whether they can declare victory for inflation. ”
The answers to these questions will largely be left to Powell’s post-meeting press conference.
Although the committee will publish its joint decision on interest rates, it will not provide an update on it Economic Forecast Summarya quarterly document that includes consensus updates on inflation, GDP growth and unemployment, as well as anonymous “dot plots” of individual officials’ interest rate expectations.
Beyond the January pause, there is considerable uncertainty about the direction of the Fed. The SEP will be updated next December.
“What we’re going to hear more and more about is the final rate,” Crosby said. “If yields continue to climb, the term will resurface, and it’s not entirely correlated with economic growth.”
So where is the end point?
Traders in the federal funds futures market are betting on a sharp rate cut, with the benchmark rate expected to reach a target range of 3.75%-4.0% by the end of 2025, a full percentage point below current levels following a half-cut in September. Banks’ guaranteed overnight financing rates are more cautious, with short-term interest rates expected to be around 4.2% by the end of next year.
“A key question here is, what is the end point of this rate-cutting cycle?” said Bill English, the Fed’s former director of monetary affairs and now a finance professor at the Yale School of Management. “Quickly, they have to think about what we think is going to happen in this period of rate cuts with the economy looking pretty strong. They may want to pause very quickly and see how things develop.”
Powell may also be asked to address the Fed’s ongoing efforts to reduce its bond holdings. balance sheet.
Since taking action in June 2022, the Fed has reduced its holdings of U.S. Treasury bonds and mortgage-backed securities by nearly $2 trillion. Fed officials said balance sheet shrinkage is likely to continue even as interest rates are cut, although Wall Street expects the runoffs to end as soon as early 2025.
“They’re happy to keep this infiltration in the background, and they’re probably going to continue to do that,” English said. “But the next few meetings will be of interest to a lot of people. When will they make further adjustments to the pace of the draft?”
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