What to Expect From Next Week’s Federal Reserve Meeting on Interest Rates

The Federal Reserve is widely expected to cut borrowing costs when it meets next Wednesday, and officials could shed light on how recent economic data might affect their decisions on interest rates in the new year.

Financial markets are pricing in a 97% chance the Federal Reserve will cut the fed funds rate by a quarter percentage point to a range of 4.25% to 4.5% according to the CME Group’s FedWatch tool, which forecasts rate movements based on fed funds futures trading data. In the year ahead, such rate reductions could be sparse.

The Fed’s rationale for cutting rates has diminished recently in the wake of reports showing inflation has stayed stubbornly above the Fed’s goal of a 2% annual rate, while jobs remain relatively plentiful. The Fed reduced its benchmark interest rate in September and November after holding it at a two-decade high for more than a year in order to subdue the post-pandemic burst of inflation.

The fed funds rate influences interest rates on credit cards, auto loans, and business loans. Today’s high rates are intended to be something like sand in the gears of the economy, discouraging borrowing and slowing down activity to reduce inflation pressures.

The Fed’s mission is to not only fight inflation but to prevent severe unemployment. Earlier this fall, a slowdown in the job market made Fed officials more concerned about that part of of their dual mission, prompting a steep 50-point rate cut in September. Employers have slowed hiring, although have avoided large-scale layoffs.

Economists Projecting Fewer Cuts in 2025

The open questions for Wednesday’s meeting are how the Fed will balance those two priorities in its future rate cut plans and what Fed chair Jerome Powell will say about the outlook in a post-meeting press conference. While the rate moves next week are all but set in stone, future cuts are up in the air.

When Fed policymakers last made economic projections in September, they forecast trimming the rate to a range of 3.25% to 4.5% by the end of 2025, an entire percentage point below the anticipated level at the end of this year.

Economists at Wells Fargo predicted the next round of projections, due at Wednesday’s meeting, would show only three quarter-point cuts in 2025 instead of four. Economists at Deutsche Bank predicted that projections aside, the Fed will keep rates on hold and not cut for at least a year. Moody’s Analytics forecast two rate cuts next year.

Trump’s Policies Are a Wildcard for the Fed

The changeover in presidential administration makes predicting the future a chancier business than usual. The trajectory of inflation, and the economy, could hinge on incoming president Donald Trump’s economic plans, especially the heavy tariffs he said he would slap on U.S. trading partners on day one of his administration.

Economists’ assumptions vary about how severe those tariffs will be, to what extent they’ll be just a negotiation tactic, and what effect they’ll have on the economy. Many forecasters assume inflation will rise, as merchants pass the cost of the new import taxes on to consumers.

Complicating the implications for the Fed, tariffs could also hurt U.S. businesses and economic growth, which would push the Fed to cut rates to boost business to preserve the labor market.

“The challenge for the Federal Reserve will be to parse out the supply-side shock of tariffs from demand-driven trends in employment and inflation,” economists at Wells Fargo Securities wrote in a commentary.

All those open questions could push the Fed to be more cautious about future rate cuts.

“The potential for dramatic shifts in trade and domestic policy wrought by the incoming Trump administration is an added uncertainty and supports a more wait-and-see approach from the FOMC,” Matt Colyar, an economist at Moody’s Analytics, wrote in a commentary.