The Fed prepares for the last cut of the Biden era

The Federal Reserve is expected to announce a quarter-point cut to its main lending rate at its meeting on Wednesday, despite the recent rise in inflation, in the last central bank meeting of Joe Biden’s presidency. It is expected that the Fed signals a slower path of cuts going forward due to uncertainty about the impact of President-elect Donald Trump’s economic proposals. The meeting on Tuesday and Wednesday this week is the Fed’s last rate decision before Biden leaves the White House on Jan. 20, handing the keys back to Republican Trump for a second term, with analysts expecting major policy changes. “The Fed should be more gradual in easing monetary policy in view of the policies that will be implemented by the (Trump) administration“Gregory Daco, chief economist at EY, told AFP, adding that he still expects policymakers to vote for a 25 basis point rate cut this week.

While the Fed has a mandate to act independently of Congress to address inflation and unemployment, it must still consider the effects of the government’s fiscal policy on the world’s largest economy. Trump has promised to address the high cost of living, a major concern of voters who sent him back to the White House in the November election, thanks to which he defeated Vice President Kamala Harris. But many analysts have expressed concern about some of his major policy initiatives, in particular his threats to implement extensive tariffs on goods entering the United States and to deport millions of illegal workers.

“These two things together tend to simultaneously fuel inflation and slow down growth,” KPMG chief economist Diane Swonk said, adding that she still expected the Fed to announce a rate cut on Wednesday. The Fed has cut rates by 0.75 percentage points since September. The Fed’s change in attitude was driven by the data: the preferred inflation indicator has collapsed in recent years and, despite a recent rise, remains close to the 2% target. At the same time, US economic growth is still proving surprisingly robust. The labor market has weakened slightly, but remains resilient overall. A quarter-point cut this week would bring the Fed’s key lending rate to between 4.25 and 4.50 percent, a percentage point lower than before policymakers began cutting rates at the start of this year.

On Friday, futures markets were pricing in a more than 95% chance that the Fed would proceed with a quarter-point cut. But the picture for next year looks much less certain, with financial markets estimating a chance of just under 65% that rates will be three-quarters of a percentage point lower at the end of 2025 than today. That would suggest two more quarter-point rate cuts next year, beyond the one expected on Wednesday. Along with his rate decision, theFed will also release updated economic forecastswhich will include estimates of the number of interest rate cuts that policymakers expect in the coming years.

In September, members of the Fed’s rate-setting Federal Open Market Committee (FOMC) averaged four more quarter-point rate cuts in 2025, predicting the bank’s benchmark lending rate would fell between 3.25 and 3.5%. Given the slight rise in inflation since then, some analysts now predict a potentially slower path to cuts next year. In a recent note to clients, Barclays economists predicted the Fed would cut by a quarter of a point on Wednesday but would “signal a more gradual rate path thereafter” forecasting only two rate cuts in 2025. “We continue to forecast consecutive cuts of 25 bps (basis points) in December, January and March, followed by quarterly cuts in June and September,” Goldman Sachs economists wrote in a note to investors. But, they added, “Recent comments from Fed officials raise the risk that the FOMC could slow the pace soonerperhaps already from the January meeting”. (AGI) Gin