Fed Rate Decision Preview: 25 Basis Point Cut Expected, But Spotlight Will Shift to Chair Powell's Outlook on Future Policies

When the Federal Reserve wraps up its latest meeting on Thursday, investors anticipate a notable, though predictable, outcome: a 25 basis point interest rate cut.

The Federal Reserve is widely expected to announce a 25 basis point interest rate cut on Thursday, marking a slowdown in the pace of rate hikes.

However, the decision will be closely followed by investors eager to gauge Chair Jerome Powell’s outlook on future Fed policies.

Here are some key points to watch for in the upcoming announcement.

The backdrop of political change

The Fed meeting comes against the backdrop of an altered political landscape following Donald Trump’s return to the presidential scene.

Trump’s policy ambitions—tax cuts, increased government spending, and protectionist tariffs—could pose complex challenges for the Fed.

During his previous term from 2017 to 2021, Trump’s economic approach kept inflation below 3%, despite aggressive fiscal measures.

However, economists caution that repeating such a playbook now might rekindle inflationary pressures.

Krishna Guha, head of global policy at Evercore ISI, predicts that Powell will seek to strike a neutral tone, maintaining the Fed’s tradition of staying apolitical.

Powell will likely indicate that the Fed needs time to evaluate the incoming administration’s plans and will adjust policy only when there’s clarity on actual implementations.

Powell’s balancing act: Immediate cuts and future paths

With a quarter-point cut on the table, the fed funds rate will move closer to 4.5%-4.75%, following last month’s 50 basis point reduction.

Traders are eyeing Powell’s post-meeting remarks for signals about the future.

The rate influences consumer loans and other forms of debt, indirectly impacting spending and investment.

Quincy Krosby, LPL Financial’s chief global strategist, said in a CNBC report that “everyone is on the lookout for future rate cuts and whether anything is telegraphed.”

Krosby noted that despite the Fed’s ongoing focus on tempering inflation, a crucial question remains: can Powell and his team declare victory on this front?

Unanswered questions and economic projections

One notable absence from Thursday’s announcement will be an updated Summary of Economic Projections (SEP).

This quarterly report outlines officials’ predictions for GDP, inflation, unemployment, and interest rates.

The next SEP release is due in December, which could provide more insight into how the Fed views the economic path amid evolving political dynamics.

Bill English, former head of monetary affairs at the Fed and current Yale finance professor, pointed out in the report that the term “terminal rate” may re-enter discussions if yields climb further without a clear link to growth.

English suggested that the Fed might consider pausing its rate adjustments soon to assess their impact on the economy, which remains resilient despite uncertainties.

Looking to 2025: market forecasts and future cuts

The future path of interest rates is murky, with market sentiment divided.

Fed funds futures indicate a potential target range drop to 3.75%-4.0% by 2025, a full percentage point below current levels.

Meanwhile, the Secured Overnight Financing Rate suggests a more conservative outlook, showing short-term rates stabilizing around 4.2% by the end of 2025.

This disparity reflects traders’ varied assessments of economic resilience and the influence of Trump’s policy ambitions on inflation and growth.

If inflation spikes again due to protectionist policies or fiscal spending, Powell and his team might need to reconsider their current rate trajectory.

The bond run-off: a quiet, persistent strategy

Beyond rate adjustments, the Fed has been steadily reducing its balance sheet since June 2022, with nearly $2 trillion in bonds shed so far.

Powell has suggested that this process could continue even during rate cuts, though Wall Street anticipates the run-off may end by early 2025.

English highlighted that while the Fed has been content with letting this strategy quietly unfold, future adjustments could come under scrutiny.